US Fiscal Cycle and the Dollar

Zhengyang Jiang
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Zhengyang Jiang: Kellogg School of Management, Northwestern University

No 667, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: I document a new pattern unique to the US: When the US fiscal condition is strong, the dollar is strong and continues to appreciate in the next 3 years. This pattern makes the dollar an extraordinary asset, because most assets have lower prices when their expected returns increase. A stylized model accounts for this pattern, provided that the US fiscal cycle comoves with the US investors' risk premium. This model further predicts that the US fiscal cycle explains the forward premium puzzle, the term premium, the dollar carry trade, and currency return momentum, all confirmed in the data. What makes this fiscal-currency comovement unique to the US? I conjecture its exceptional external balance sheet and its special role as the hegemon issuer of the world's reserve assets are contributing factors, and provide suggestive evidence from cross-border capital flows and official foreign reserves.

Date: 2019
New Economics Papers: this item is included in nep-acc, nep-ifn and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:667

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