Working Paper: NBER ID: w27682
Authors: Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig
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.
Keywords: Global Financial Cycle; Dollar Safety; Monetary Policy
JEL Codes: E4; F3; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US monetary policy (E52) | global financial cycle (F65) |
| US monetary policy (E52) | supply of dollar assets (E41) |
| supply of dollar assets (E41) | global economy (F01) |
| tightening of US monetary policy (E52) | appreciation of the dollar (F31) |
| tightening of US monetary policy (E52) | increase in convenience yield on dollar bonds (E43) |
| increase in convenience yield on dollar bonds (E43) | appreciation of the dollar (F31) |
| demand for dollar bonds (E41) | convenience yield on dollar bonds (E43) |
| asymmetric nature of financial markets (G19) | dominance of dollar debt globally (F65) |
| demand for dollar-denominated bonds (E41) | convenience yield on dollar bonds (E43) |