Collateral Advantage: Exchange Rates, Capital Flows, and Global Cycles

Michael Devereux, Charles Engel and Steve Pak Yeung Wu

No 31164, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We construct a two-country New Keynesian model in which the U.S. enjoys an “exorbitant privilege” as its government bonds are desired by banks both in the U.S. and abroad as superior collateral. In times of global stress, the dollar appreciates since the demand for high-quality collateral drives up the “convenience yield” earned by U.S. government bonds. There is “retrenchment” - each country reduces its holdings of foreign assets - a critical determinant of which is the endogenous response of prices and returns. The model can account for the observed exchange rate and external position behavior of the U.S. While the model incorporates only a small change from a workhorse New Keynesian model with segmented financial markets, it synthesizes and reconciles three major perspectives: on exorbitant privilege, global financial intermediation, and convenience yields.

JEL-codes: F30 F40 G15 (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg, nep-ifn, nep-mon and nep-opm
Note: AP IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.nber.org/papers/w31164.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:31164

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w31164

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().