The Flight to Safety and International Risk Sharing

Rohan Kekre and Moritz Lenel

American Economic Review, 2024, vol. 114, issue 6, 1650-91

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 finances 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-codes: E32 E43 E44 E52 F44 G11 G15 (search for similar items in EconPapers)
Date: 2024
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Working Paper: The Flight to Safety and International Risk Sharing (2021)
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DOI: 10.1257/aer.20211319

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