Exorbitant Privilege: A Safe-Asset View

Zhengyang Jiang

No 32454, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: I propose a model of the reserve currency paradigm that centers on liquidity demand for safe assets. In global recessions, the demand for U.S. safe assets increases and raises their convenience yields, giving rise to stronger dollar and countercyclical seigniorage revenues. The seigniorage revenues raise the U.S. wealth and consumption shares in recessions, despite the U.S. suffering portfolio losses from external positions. This asset demand channel also connects exchange rates to bond holdings, which provides new perspectives on exchange rate disconnect and the exchange rate-capital flow relationship. Under this safe-asset view, exorbitant privilege does not require exorbitant duty.

JEL-codes: E44 F32 G15 (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-fdg, nep-ifn, nep-opm and nep-upt
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