Global Flight to Safety, Business Cycles, and the Dollar

Martin Bodenstein, Pablo Cuba-Borda, Nils Gornemann, Ignacio Presno, Andrea Prestipino, Albert Queraltó and Andrea Raffo
Additional contact information
Ignacio Presno: https://www.federalreserve.gov/econres/ignacio-presno.htm
Albert Queraltó: https://www.federalreserve.gov/econres/albert-queralto.htm

No 1381, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We develop a two-country macroeconomic model that we fit to a set of aggregate prices and quantities for the U.S. and the rest of the world. In addition to a standard array of shocks, the model includes time variation in agents’ preference for safe bonds. We allow for a component of this time variation to be common across countries and biased toward dollar-denominated safe assets, and refer to this component as global flight to safety (GFS). We find that GFS shocks are the most important shocks driving world business cycles, and are also important drivers of activity in the U.S. and especially abroad. An adverse GFS shock lowers global GDP and inflation, widens global corporate credit spreads, and appreciates the dollar. These effects are very close to those obtained from a structural VAR which uses the excess bond premium (Gilchrist and Zakrajšek, 2012) as proxy for global flight to safety.

Keywords: Econometrics and economic theory; International economics; Macroeconomic activity (search for similar items in EconPapers)
JEL-codes: E32 F30 H22 (search for similar items in EconPapers)
Date: 2023-10-02
New Economics Papers: this item is included in nep-fdg, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Global Flight to Safety, Business Cycles, and the Dollar (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1381

DOI: 10.17016/IFDP.2023.1381

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