IDEAS home Printed from https://ideas.repec.org/p/ecl/stabus/3747.html

Dollar Safety and the Global Financial Cycle

Author

Listed:
  • Jiang, Zhengyang

    (Kellogg School of Management, Northwestern University)

  • Krishnamurthy, Arvind

    (Stanford University, Graduate School of Business, and NBER)

  • Lustig, Hanno

    (Stanford University, Graduate School of Business, and NBER)

Abstract

US monetary policy has an outsized impact on the world economy, a phenomenon that Rey (2013) dubs the global financial cycle. Changes in the US dollar also have an outsized impact on the world economy, while shocks in foreign countries have smaller impacts on the U.S. We build a model to rationalize these facts stemming from the special demand for dollar safe assets. In the model, dollar safe assets trade at a premium; that is, they offer especially low returns. Banks and firms that have the collateral to issue dollar safe assets can collect this premium. Institutions in the U.S. do so against dollar collateral, while institutions in foreign countries do so against local currency collateral, but in the process take on exchange rate risk. Changes in U.S. monetary policy impact the supply of dollar safe assets, but do not offset shocks to safe asset demand. Shocks to U.S. monetary policy and shocks to the value of the dollar transmit across the globe and are a global risk factor. We present evidence from movements in the Treasury basis that support the mechanism underlying our theory.

Suggested Citation

  • Jiang, Zhengyang & Krishnamurthy, Arvind & Lustig, Hanno, 2018. "Dollar Safety and the Global Financial Cycle," Research Papers 3747, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3747
    as

    Download full text from publisher

    File URL: https://www.gsb.stanford.edu/gsb-cmis/gsb-cmis-download-auth/472536
    Download Restriction: no
    ---><---

    Other versions of this item:

    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecl:stabus:3747. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/gsstaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.