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The U.S. Dollar Safety Premium

  • Matteo Maggiori

    (NYU)

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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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 75.

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Date of creation: 2013
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Handle: RePEc:red:sed013:75
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