Abstract: US fiscal policy has a unique global footprint: foreign fiscal conditions play a limited role in driving global risky asset prices once the US fiscal condition is appropriately controlled for. 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 unique international transmission across the global innovation network, enabling it to exert an outsized influence over i) foreign growth prospects, ii) foreign fiscal conditions, iii) foreign policy uncertainty and consequently iii) global risk-premia. I propose a multi-country general equilibrium model to formalise this argument and show that it can quantitatively account for my empirical findings. 

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 quantitative general equilibrium model where the US assumes the exact opposite role. At the heart of this twist is a fiscal asymmetry: the US has more fiscal capacity 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.

Abstract: U.S. monetary policy shocks have large effects on risky asset prices and exchange rates across many countries. To what extent can foreign central banks offset these effects by adjusting their own monetary policy stance? We investigate this question empirically, using a new dataset of high-frequency monetary policy shocks for G10 countries and the methodology of McKay and Wolf (2023), to estimate the effects of U.S. monetary policy shocks under counterfactual foreign policy responses. Our estimates imply that after a surprise U.S. monetary tightening, the average foreign country could offset the depreciation of its currency against the dollar by persistently increasing its own policy rate, or alternatively offset the decline in local stock prices by aggressive decreasing its own policy rate. These estimates imply that foreign policymakers face significant tradeoffs when attempting to simultaneously stabilize policy rates, asset prices, and exchange rates in response to U.S. monetary policy decisions.

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.

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 studies the post-Brexit behaviour of UK international asset prices. This period has been characterised by i) consistent underperformance of UK equities vis-a-vis the rest of the world (ROW) and ii) sustained sterling depreciation against the ROW. These two facts are linked: the underperformance of the UK stock market during this period is entirely driven by the sterling depreciation as opposed to local equity return fluctuations orthogonal to the exchange rate. I interpret these novel stylised facts through the lens of an international long-run risk (LRR) model where Epstein-Zin (EZ) agents share expected growth risks with each other. Interpreting Brexit as a negative expected growth shock, the ROW insures the UK by shifting global consumption resources to the UK in the aftermath of Brexit. This lowers the currency risk premium for a global investor going long the pound against a basket of foreign currencies, causing i) sterling to depreciate over the long run and ii) the UK stock market to underperform the ROW during the post-Brexit period. UK trade data empirically validates the operation of this recursive risk-sharing scheme during and after Brexit.

Abstract: This paper explores the important role that US multinationals play in the international transmission of US fiscal shocks. Large US multinationals play an integral role in the global economy, featuring prominently in the national production and trade flows for non-US countries due to global value chains. Thus heightened future tax uncertainty associated with the accumulation of US government debt can distort the global R\&D investment incentives of US multinationals, depressing global innovation and expected future global growth. If preferences are recursive, this variation in global growth uncertainty maps directly into higher global risk premia, rationalising the strong negative link between the US fiscal condition and future global equity returns observed in the data. I formalise this mechanism by studying the international transmission of US fiscal shocks inside a multi-country general equilibrium model with multinational production.

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