Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/305521 
Year of Publication: 
2024
Series/Report no.: 
CESifo Working Paper No. 11279
Publisher: 
CESifo GmbH, Munich
Abstract: 
I propose a model of the reserve currency paradigm that centers on liquidity demand for safe assets. In global recessions, the demand for U.S. safe assets increases and raises their convenience yields, giving rise to stronger dollar and countercyclical seigniorage revenues. The seigniorage revenues raise the U.S. wealth and consumption shares in recessions, despite the U.S. suffering portfolio losses from external positions. This asset demand channel also connects exchange rates to bond holdings, which provides new perspectives on exchange rate disconnect and the exchange rate-capital flow relationship. Under this safe-asset view, exorbitant privilege does not require exorbitant duty.
Subjects: 
exorbitant privilege
reserve assets
international monetary system
capital flows
JEL: 
E44
F32
G15
Document Type: 
Working Paper
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