 Safe U.S. Assets and U.S. Capital FlowsJournal of International Money and Finance, 2020, vol. 102, issue C Abstract: The “exorbitant privilege” of the U.S. – the ability of the U.S. to earn positive net income on its international portfolio even though it is a net debtor – may be linked to the “convenience yield” on U.S. government bonds. The convenience yield refers to the low pecuniary return on U.S. Treasuries associated with the non-pecuniary yield on those assets arising from their liquidity and safety. A simple model shows how the convenience yield can lead to current account deficits, an appreciated currency in real terms, and positive net factor income. Empirically, we find evidence associating the convenience yield with a strong dollar in real terms, and, in turn, evidence linking the real exchange rate to the U.S. current account. We calculate that this channel may account for approximately 40% of the U.S. current account deficit. We then discuss factors that might influence the convenience yield, and discuss possible drawbacks to the exorbitant privilege. Keywords: Safe assets; Exorbitant privilege; Current account deficit; Convenience yield (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:102:y:2020:i:c:s0261560619305819 DOI: 10.1016/j.jimonfin.2019.102102 Access Statistics for this article Journal of International Money and Finance is currently edited by J. R. Lothian More articles in Journal of International Money and Finance from Elsevier |
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