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The US Safety Puzzle

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Author
Sun Yong Kim
Category
Financial
Date Posted
2022/09/06
Date Retrieved
2022/11/22
Date Revised
Date Written
2022/08/30
Description
The United States (US) is a relatively safe country: her macro quantities asset prices and wealth share all rise relative to the rest of the world (ROW) during global downturns. This is surprising for two reasons. Firstly it challenges the traditional view that the US is the global insurance provider who insures the ROW by transferring wealth abroad during periods of global stress. Secondly it is at odds with the dollar’s hedging properties: standard models tie countercyclical dollar dynamics to relative US riskiness vis-a-vis the ROW. To resolve this apparent puzzle I demonstrate that US safety is an illusion: whilst she seems safe due to her relative insulation against traditional global macro risks the US is actually highly exposed to a hidden source of global risk: expected global growth or global long-run risks. Using a multi-country general equilibrium model with Epstein-Zin preferences endogenous growth and international technology diffusion I show that this heterogeneity in gl
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JEL Classifications
E0 F3 F4 G1
Keywords
International Finance Asset Pricing Long Run Risks Global Wealth Distribution Reserve Currency Paradox Global Financial System
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Pages
108
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570
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URL
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4283328
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