Global Flight to Safety, Business Cycles, and the Dollar

RePEc Short ID: pbo319
ORCID iD: 0000-0002-4400-3719

Bodenstein, Martin; Cuba-Borda, Pablo A.; Gornemann, Nils M.; Presno, Ignacio; Prestipino, Andrea; Queraltó, Albert; Raffo, Andrea

doi:10.17016/IFDP.2023.1381

Working Paper

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 Zakrajšek, 2012) as proxy for global flight to safety.

Keywords: Econometrics and economic theory; International economics; Macroeconomic activity;

JEL Classification: E32; F30; H22;

https://doi.org/10.17016/IFDP.2023.1381