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Global Flight to Safety, Business Cycles, and the Dollar

Working Paper 799 | Published October 11, 2023

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Authors

Martin Bodenstein Board of Governors of the Federal Reserve System
Pablo Cuba Borda Board of Governors of the Federal Reserve System
Nils Gornemann Board of Governors of the Federal Reserve System
Ignacio Presno Board of Governors of the Federal Reserve System
Andrea Prestipino Board of Governors of the Federal Reserve System
Albert Queralto Board of Governors of the Federal Reserve System
Andrea Raffo Senior Vice President and Director of Research
Global Flight to Safety, Business Cycles, and the Dollar

Abstract

We develop a two-country macroeconomic model that we fit to a set of aggregate prices and quantities for the U.S. and the rest of the world. In addition to a standard array of shocks, the model includes time variation in agents’ preference for safe bonds. We allow for a component of this time variation to be common across countries and biased toward dollar-denominated safe assets, and refer to this component as global flight to safety (GFS). We find that GFS shocks are the most important shocks driving world business cycles, and are also important drivers of activity in the U.S. and especially abroad. An adverse GFS shock lowers global GDP and inflation, widens global corporate credit spreads, and appreciates the dollar. These effects are very close to those obtained from a structural VAR which uses the excess bond premium (Gilchrist and Zakraj¡sek, 2012) as proxy for global flight to safety.