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Pricing Risk Globally: Intermediary Constraints, the Dollar, and the Global Financial Cycle

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Abstract

We study how increased uncertainty about U.S. asset returns affects global asset prices and exchange rates in a two-country model with intermediary balance-sheet constraints. Empirically, uncertainty shocks widen global credit spreads, appreciate the dollar, and increase currency risk premia. In our model, higher uncertainty tightens intermediary constraints and lowers asset prices, reversing the counterfactual asset price increase in frictionless models. Because constraints make net worth especially valuable in bad times, risk premia respond strongly to uncertainty shocks. This interaction allows the model to match the credit spread, currency premium, and dollar responses in the data.

Suggested Citation

  • Ozge Akinci & Ṣebnem Kalemli-Özcan, 2026. "Pricing Risk Globally: Intermediary Constraints, the Dollar, and the Global Financial Cycle," International Finance Discussion Papers 1445, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:103716
    DOI: 10.17016/IFDP.2026.1445
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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