Abstract: The US fiscal condition is the single most important fiscal determinant of any risky asset price, anywhere around the world. Even for their own risky asset markets, foreign fiscal conditions play a limited role in price determination once the US fiscal condition is appropriately controlled for. These findings therefore shed new light on the economic origins of the global financial cycle, challenging the traditional view that it is a purely monetary phenomenon. To explain these results, I advance a novel fiscal mechanism that emphasises the special US role as the global innovation leader. This empowers the US fiscal policy with a large international transmission across the global innovation network, enabling it to influence i) foreign growth, ii) foreign fiscal conditions, iii) foreign policy uncertainty and consequently iv) global risk-premia. The model qualitatively and quantitatively explains my empirical findings, with key model implications verified in the data.

Abstract:  The United States (US) is a relatively safe country: her global consumption and wealth shares are countercyclical. These findings are hard to square with the traditional view that the US is the global insurance provider. Given this challenge, I build a model where the US assumes the exact opposite role. Driving this twist is a fiscal asymmetry: the US runs more countercyclical fiscal policy than other countries. Taking this as given the US emerges as the global insurance receiver, enabling my model to rationalise many key features of the modern global financial system. Key to these results is the interaction between the US fiscal condition, global innovation and growth, international risk-sharing, the dollar and global risk premia. These results therefore highlight the special role that the US fiscal policy plays in driving puzzling features within the modern global financial system, a novel insight that has received surprisingly little emphasis thus far.

Abstract:  US fiscal policy has a global footprint: deterioriations in the US fiscal condition i) depress local risky asset prices and ii) predict higher future global equity returns moving forward. Contrary to traditional international trade theories, these patterns are not driven by distance: Canadian and Mexican asset prices are actually less exposed to US fiscal shocks than the asset prices of more distant countries. Rather, I find that these patterns are more pronounced for countries that have deeper US multinational (MNC) presence. To explain these striking results, I build a quantitative multi-country endogenous growth model that incorporates multinational production and rich fiscal policy dynamics. The model qualitatively and quantitatively accounts for my empirical findings with the key testable predictions verified in the data.

Abstract:  This paper explores the granular origins of the global financial cycle in risky asset prices. In particular, I emphasise the role that U.S. multinationals (MNCs) play in driving global macroeconomic and financial fluctuations. To formalise this argument, I develop a tractable multi-country general equilibrium model in which large U.S. MNCs transmit idiosyncratic firm-level shocks internationally through global production linkages and preset nominal prices. Idiosyncratic shocks to large U.S. firms aggregate into an emergent "granular" U.S. factor that shapes world consumption, interest rates, and risky asset returns. Countries more exposed to U.S. MNC activity exhibit stronger co-movement in equities, bonds, and exchange rates, lower real interest rates, and higher nominal synchronization. In summary, the model highlights U.S. MNC presence as a sufficient statistic for a country's exposure to global financial cycle risk.

Abstract:  This paper identifies a novel economic source of currency risk premia that is tied to the US. Countries where US multinationals (MNCs) play a larger role in driving local production and growth have lower interest rates and currency risk premia. I rationalise this observation by building a multi-country endogenous growth model where U.S. MNCs deploy production activities both locally and abroad. Countries with a deeper US MNC presence are more exposed to US specific shocks that propagate globally through the foreign production activities of these MNCs. As a result, investors require a risk premium for holding the currencies of these countries relative to the currency of countries for whom the converse is true. Key model implications are empirically verified.

Abstract: We uncover several empirical facts regarding the cyclical properties of dollarisation in emerging market (EME) countries. During times of global stress when the dollar premium is high, EME sovereigns increase their dollar borrowing share whereas the corporate sector lowers their dollar borrowing shares. This dichotomy is largely driven by the EME non-financial corporate sectors. These results are unique to EME countries and are far more pronounced for EME countries whose corporate sector has a higher degree of currency mismatch on their corporate balance sheets. We interpret these empirical findings as the result of risk-sharing between EME sovereign and corporate sectors. Rises in the dollar premium lower the relative cost of dollar debt vis-a-vis local currency debt, making it optimal for EME sovereigns to insure the corporate sector by borrowing more dollar debt during times of global stress. Conversely, binding financial frictions force EME corporates to retreat from dollar funding markets during these global episodes.

Abstract: This paper investigates the empirical joint dynamics between long run consumption risks (LRRs), currency excess returns, currency risk premia and global currency risk factors. Using a novel identification strategy to identify country level LRRs, we uncover three main results. Firstly, currency excess returns and relative LRRs are negatively correlated: the currencies of countries that suffer bad relative long run shocks vis-a-vis the US appreciate against the dollar on average. Secondly, currency risk premia and relative LRRs are positively correlated: over the long run such currencies depreciate against the dollar, resulting in lower expected currency returns moving forward. Thirdly well known global currency risk factors such as the High-Minus-Low (HML) carry trade sorted on interest rate differentials and the HML dollar beta portfolio sorted on time varying dollar exposures are highly correlated with appropriately constructed global and US LRR factors respectively. An international LRR model where two LRR factors - US and global - drive common sources of risk in the world economy can quantitatively explain these empirical findings.