IDEAS home Printed from https://ideas.repec.org/p/red/sed019/667.html
   My bibliography  Save this paper

US Fiscal Cycle and the Dollar

Author

Listed:
  • 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.

Suggested Citation

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

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2019/paper_667.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Kanda Naknoi & Hanno Lustig & YiLi Chien, 2017. "Why Are Exchange Rates So Smooth? A Heterogeneous Portfolio Explanation," 2017 Meeting Papers 214, Society for Economic Dynamics.
    2. Backus, David K. & Smith, Gregor W., 1993. "Consumption and real exchange rates in dynamic economies with non-traded goods," Journal of International Economics, Elsevier, vol. 35(3-4), pages 297-316, November.
    3. Christian Heyerdahl-Larsen, 2014. "Asset Prices and Real Exchange Rates with Deep Habits," Review of Financial Studies, Society for Financial Studies, vol. 27(11), pages 3280-3317.
    4. Ian Martin, 2011. "The Forward Premium Puzzle in a Two-Country World," NBER Working Papers 17564, National Bureau of Economic Research, Inc.
    5. Eben Lazarus & Daniel J. Lewis & James H. Stock & Mark W. Watson, 2018. "HAR Inference: Recommendations for Practice," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 36(4), pages 541-559, October.
    6. Rosen Valchev, 2020. "Bond Convenience Yields and Exchange Rate Dynamics," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(2), pages 124-166, April.
    7. Cochrane, John H, 2001. "Long-Term Debt and Optimal Policy in the Fiscal Theory of the Price Level," Econometrica, Econometric Society, vol. 69(1), pages 69-116, January.
    8. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2009. "Time-Varying Risk, Interest Rates, and Exchange Rates in General Equilibrium," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 851-878.
    Full references (including those not matched with items on IDEAS)

    More about this item

    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:red:sed019:667. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.