US Fiscal cycle and the dollar

Zhengyang Jiang

Journal of Monetary Economics, 2021, vol. 124, issue C, 91-106

Abstract: A stronger US fiscal condition predicts a higher excess return on the dollar against foreign currencies in the following year, and more so against foreign currencies with higher dollar betas. A stronger foreign fiscal condition does not have such forecasting power. These findings can be explained by the unique role the US government debt plays as reserve assets. When the US fiscal condition deteriorates, financial intermediaries’ reserve constraint tightens and triggers a flight to the dollar, creating imbalances in capital flows and driving global risk premia that affect both the dollar and foreign currencies.

Keywords: Currency risk premium; Dollar; US Fiscal condition; Reserve asset (search for similar items in EconPapers)
JEL-codes: E44 F31 G11 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:124:y:2021:i:c:p:91-106

DOI: 10.1016/j.jmoneco.2021.10.002

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