We study a business cycle model of the international monetary system featuring a time-varying demand for safe dollar bonds, greater risk-bearing capacity in the U.S. than the rest of the world, and nominal rigidities. A flight to safety generates a dollar appreciation and decline in global output. Dollar bonds thus command a negative risk premium and the U.S. holds a levered portfolio of capital financed in dollars. We quantify the effects of safety shocks and heterogeneity in risk-bearing capacity for global macroeconomic volatility; U.S. external adjustment; and policy transmission, as of dollar swap lines.

More on this topic

BFI Working Paper·Dec 16, 2024

Toward an Understanding of the Political Economy of Using Field Experiments in Policymaking

Guglielmo Briscese and John List
Topics: Monetary Policy
BFI Working Paper·Jul 10, 2024

Destabilizing Digital “Bank Walks”

Naz Koont, Tano Santos, and Luigi Zingales
Topics: Monetary Policy
BFI Working Paper·Jun 11, 2024

Bankruptcy Resolution and Credit Cycles

Martin Kornejew, Chen Lian, Yueran Ma, and Pablo Ottonello
Topics: Monetary Policy