Finance Webinar（2020-27)

Topic: Global Safe Assets and the US Exorbitant Privilege

Speaker: Zefeng Chen, Stanford University

Time: Wednesday, 30 December,10:00-11:30 AMBeijing Time

Location: Microsoft Teams Online Conference Room

Abstract:

The US is the only large net borrower country in the world earning a positive net investment income, a phenomenon often referred as the exorbitant privilege. To rationalize this, I propose a new theory about the role of US in the international financial system being a service provider, in contrast to the conventional view of an insurance provider, which falsely predicts the US exorbitant privilege would vanish during the financial crisis. I build a two-country model with financial friction to explain the dynamics of the US external balance sheet and exchange rate. In the model, world financial intermediaries demand US safe assets for their convenience value, but US intermediaries do not demand foreign safe assets. Under an aggregate symmetric financial shock, the rest of the world buys more safe assets from the US despite a rise in convenience yield, the dollar appreciates, and the US takes advantage by buying more equities from the rest of the world at a low price. I show my mechanism can quantitatively match the data, while a real shock triggering risk-sharing dynamic cannot.

Introduction:

Zefeng Chen is a Ph.D. Candidate in Economics at Stanford University. His research interest lies in international finance and macro-finance, with a focus on macroeconomic implications of the US dollar dominated international financial market. He received his bachelor degree from the University of Chicago in 2015.

Your participation is warmly welcomed!