Dollar Safety and the Global Financial Cycle.

This article develops a model of the global financial cycle centered on the international demand for safe U.S. dollar assets, which generates a convenience yield—a non-pecuniary premium foreign investors pay for holding dollar-denominated safe bonds. The model explains key empirical facts including the dollar’s funding advantage, dominance in global debt issuance, flight-to-safety dynamics during crises, the U.S.’s “exorbitant privilege,” and the dollar as a global risk factor. It incorporates U.S. firms supplying safe dollar assets, U.S. banks intermediating carry trades with foreign investors, and foreign firms’ borrowing choices between local currency and dollar debt, highlighting the resulting currency mismatches and asymmetric spillovers of U.S. monetary policy to foreign economies. The analysis identifies a new version of the Triffin dilemma, where growing global demand for dollar assets leads to increased currency mismatches abroad, causing financial spillovers and contagion primarily affecting foreign countries while the U.S. remains relatively insulated. The model offers a novel transmission mechanism for U.S. monetary policy effects on exchange rates and global output, emphasizing the central role of dollar safe-asset demand in shaping international financial dynamics.