Foreign Safe Asset Demand and the Dollar Exchange Rate / Zhengyang Jiang, Arvind Krishnamurthy, Hanno Lustig.

Format:

Book

Author/Creator:

Jiang, Zhengyang.

Contributor:

National Bureau of Economic Research.

Krishnamurthy, Arvind.

Lustig, Hanno.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24439.

NBER working paper series no. w24439

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

We develop a theory that links the U.S. dollar's valuation in FX markets to the convenience yield that foreign investors derive from holding U.S. safe assets. We show that this convenience yield can be inferred from the Treasury basis: the yield gap between U.S. government and currency-hedged foreign government bonds. Consistent with the theory, a widening of the basis coincides with an immediate appreciation and a subsequent depreciation of the dollar. Our results lend empirical support to models which impute a special role to the U.S. as the world's provider of safe assets and the dollar, the world's reserve currency.

Notes:

Print version record

March 2018.