| By: |
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. |
| Date: |
2018–12 |
| URL: |
http://d.repec.org/n?u=RePEc:ecl:stabus:3747&r=all |