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The U.S. Dollar Safety Premium

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  • Matteo Maggiori

    (NYU)

Abstract

I show that the US dollar earns a safety premium versus a basket of foreign currencies and that this premium is particularly high in times of global financial stress. These findings support the view that the dollar acts as the reserve currency for the international monetary system and that it is a natural safe haven in times of crisis, when a global flight to quality toward the reserve currency takes place. During such episodes, investors are willing to earn negative expected returns as compensation for holding safe dollars. I estimate the time varying dollar safety premium by using instrumental variable techniques to condition information down.

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  • Matteo Maggiori, 2013. "The U.S. Dollar Safety Premium," 2013 Meeting Papers 75, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:75
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    Cited by:

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    2. Canzoneri, Matthew & Cumby, Robert & Diba, Behzad & López-Salido, David, 2013. "Key currency status: An exorbitant privilege and an extraordinary risk," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 371-393.
    3. Ahnert, Toni & Perotti, Enrico, 2021. "Cheap but flighty: A theory of safety-seeking capital flows," Journal of Banking & Finance, Elsevier, vol. 131(C).
    4. Wenxin Du & Joanne Im & Jesse Schreger, 2017. "The U.S. Treasury Premium," NBER Chapters, in: NBER International Seminar on Macroeconomics 2017, National Bureau of Economic Research, Inc.
    5. Du, Wenxin & Im, Joanne & Schreger, Jesse, 2018. "The U.S. Treasury Premium," Journal of International Economics, Elsevier, vol. 112(C), pages 167-181.
    6. Opie, Wei & Riddiough, Steven J., 2020. "Global currency hedging with common risk factors," Journal of Financial Economics, Elsevier, vol. 136(3), pages 780-805.

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