I suggest a dynamic mannequin of the reserve forex paradigm that facilities on the liquidity demand for secure property. In world recessions, the demand for the U.S. secure bond will increase and raises its comfort yield, giving rise to a stronger greenback and a countercyclical seigniorage income. The seigniorage income raises the U.S. wealth and consumption shares in recessions, regardless of the U.S. struggling portfolio losses from its exterior positions. This asset demand channel additionally connects change fee dynamics to the marginal utility over bond holding, which offers new views on change fee disconnect and on the connection between change charges and capital flows. Underneath this safe-asset view, exorbitant privilege doesn’t require exorbitant responsibility.
That’s from a brand new NBER working paper by Zhengyang Jiang. And right here is a few related knowledge on the rise in greenback holdings across the globe.
