The Flight to Safety and International Risk Sharing

2024/05/30 by Rohan Kekre, Moritz Lenel · 63 citations
Economics, Econometrics and Finance · #Bond #Business cycle #Economic theories and models #Economics #Exchange rate #Finance #Financial economics #Global Financial Crisis and Policies #Liberian dollar #Macroeconomics #Monetary Policy and Economic Impact #Monetary economics #Monetary policy #Portfolio #Risk premium #Swap (finance) #Us dollar #Volatility (finance)

paper · doi:10.1257/aer.20211319

published in American Economic Review 114(6), 1650-1691 (American Economic Association)

openalex publication_date 2024/05/30 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04

Abstract

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 United States 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 United States 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, US external adjustment, and policy transmission, as of dollar swap lines. (JEL E32, E43, E44, E52, F44, G11, G15)

Citations

• A Model of Safe Asset Determination

Cited by

• Offshore dollar funding shocks and the dollar exchange rate
• Preferred habitats and timing in the world’s safe asset

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