Abstract
We develop a model of the global financial cycle with one key ingredient: the international demand for safe dollar assets. The model matches patterns of dollar borrowing and currency mismatch, the U.S. external balance sheet, exorbitant privilege, spillovers of the U.S. monetary policy to the rest of the world, and the dollar as a global risk factor. In doing so, we lay out a novel transmission mechanism through which the U.S. monetary policy affects the currency market and the global economy. The global financial cycle is a dollar cycle.
Original language | English (US) |
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Pages (from-to) | 2878-2915 |
Number of pages | 38 |
Journal | Review of Economic Studies |
Volume | 91 |
Issue number | 5 |
DOIs | |
State | Published - Oct 2024 |
Funding
We thank Xuning Ding, Xu Lu, Jonathan Wallen, and Oliver Xie for excellent research assistance. We thank Rohit Lamba, Pierre-Olivier Gourinchas, Victoria Ivashina, Rohan Kekre, Moritz Lenel, Helene Rey, Jesse Schreger, and seminar participants at UC-Berkeley, CEBRA, University of Chicago, Dartmouth, ECB, Federal Reserve Board, Harvard University, Macro-Finance Society, NBER CF and IFM meetings, Northwestern University, Princeton University, Reserve Bank of India, Stanford University, Tsinghua University, UT Austin, University of Wisconsin, Yale University, AFA meetings, and ASSA meetings for their comments.
Keywords
- Convenience yields
- Exchange rates
- Safe asset demand
- U.S. monetary policy
ASJC Scopus subject areas
- Economics and Econometrics