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The Flight to Safety and International Risk Sharing

  • Rohan Kekre
  • Moritz Lenel
American Economic Review
vol. 114, no. 6, June 2024
(pp. 1650-91)
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Abstract

We study a business cycle model of the international monetary system featuring a time varying demand for safe dollar bonds, greater risk-bearing capacity in the United States than the rest of the world, and nominal rigidities. A flight to safety generates a dollar appreciation and decline in global output. Dollar bonds thus command a negative risk premium, and the United States holds a levered portfolio of capital finances in dollars. We quantify the effects of safety shocks and heterogeneity in risk-bearing capacity for global macroeconomic volatility, US external adjustment, and policy transmission, as of dollar swap lines.

Citation

Kekre, Rohan, and Moritz Lenel. 2024. "The Flight to Safety and International Risk Sharing." American Economic Review, 114 (6): 1650-91. DOI: 10.1257/aer.20211319

Additional Materials

JEL Classification

  • E32 Business Fluctuations; Cycles
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E44 Financial Markets and the Macroeconomy
  • E52 Monetary Policy
  • F44 International Business Cycles
  • G11 Portfolio Choice; Investment Decisions
  • G15 International Financial Markets