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US Fiscal Cycle and the Dollar

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  • Zhengyang Jiang

    (Kellogg School of Management, Northwestern University)

Abstract

I document a new pattern unique to the US: When the US fiscal condition is strong, the dollar is strong and continues to appreciate in the next 3 years. This pattern makes the dollar an extraordinary asset, because most assets have lower prices when their expected returns increase. A stylized model accounts for this pattern, provided that the US fiscal cycle comoves with the US investors' risk premium. This model further predicts that the US fiscal cycle explains the forward premium puzzle, the term premium, the dollar carry trade, and currency return momentum, all confirmed in the data. What makes this fiscal-currency comovement unique to the US? I conjecture its exceptional external balance sheet and its special role as the hegemon issuer of the world's reserve assets are contributing factors, and provide suggestive evidence from cross-border capital flows and official foreign reserves.

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  • Zhengyang Jiang, 2019. "US Fiscal Cycle and the Dollar," 2019 Meeting Papers 667, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:667
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    Cited by:

    1. Zhengyang Jiang & Arvind Krishnamurthy & Hanno Lustig, 2021. "Foreign Safe Asset Demand and the Dollar Exchange Rate," Journal of Finance, American Finance Association, vol. 76(3), pages 1049-1089, June.

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