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Abstract
We propose a general equilibrium model in which U.S. monetary policy affects global risk premia by revaluing the wealth of currency-mismatched intermediaries. Assuming their portfolios are mean-variance efficient, intermediaries must be short the dollar. A U.S. tightening thus erodes intermediaries' net worth and raises the global price of risk. We discipline this mechanism to rationalize the effects of U.S. monetary policy on international asset prices, and we study its real implications. In a future with higher dollar interest rates, as due to lower foreign demand for dollar-denominated assets, intermediaries' dollar funding and U.S. monetary policy spillovers are dampened.
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