Topic: Dollar Safety and the Global Financial Cycle

Speaker: Zhengyang Jiang, Assistant Professor of Finance, Kellogg School of Management, Northwestern University

Date: December 11, 2019 (Wednesday)

Time: 10:00am-11:30am

Location: 4-101, Building 1

Language: English

Abstract:

U.S. monetary policy shocks have an outsized impact on the world economy, a phenomenon that is described by Rey’s (2013) “global financial cycle”. In contrast, shocks in foreign countries have smaller impacts on the U.S. We build a model to rationalize these facts based on the special demand for dollar safe assets. In the model, dollar safe assets trade at a premium: that is, they offer especially low returns. Banks and firms that have the collateral to issue dollar safe assets can collect this premium. U.S. institutions do so against dollar collateral, while foreign institutions do so against foreign currency collateral, taking on exchange rate risk in the process. U.S. monetary shocks impact the supply of dollar safe assets, affecting dollar safe assets’ premium and the dollar’s value. This impact transmits across the globe and generates a global risk factor. We present evidence from movements in the Treasury basis to support the mechanism underlying our theory.

About the speaker:

Zhengyang Jiang is an Assistant Professor of Finance at Kellogg School of Management, Northwestern University. His research focuses on international finance and macroeconomics. His main line of inquiry is about the role of government in the provision of currencies and safe assets, and how this role affects exchange rates, risk premia, and economic outcomes. A related topic is how the financial sector intermediates the provision of currencies and safe assets, and how the monetary policy affects this intermediation. In the broader field, he also works on the asset pricing implications of the global production network.