US money market funds (MMFs) play an important role in short-term markets as large investors of Treasury bills (T-bills) and repurchase agreements (repos). We build a theoretical model in which MMFs strategically interact with banks and each other. These interactions generate interdependencies between repo and T-bill markets, affecting the pricing of these near-money assets. Consistent with the model's predictions, we empirically show that when MMFs allocate more cash to the T-bill market, T-bill rates fall, and the liquidity premium on T-bills rises. To establish causality, we devise instrumental variables guided by our theory. Using a granular holding-level dataset to examine the channels, we show that MMFs internalize their price impact in the T-bill market when they set repo rates and tilt their portfolios towards repos with the Federal Reserve when Treasury market liquidity is low. Our results have implications for the transmission of monetary policy, benchmark rates, and government debt issuance.

We explain variation in the strength of the U.S. dollar with capital flows driven by primitive economic factors. Prior to the global financial crisis, global savings and demand shifts depreciated the dollar, whereas they appreciated it after. Interest rates impacted the dollar’s value over short horizons, but declined in significance over longer horizons as rates converged. Our estimates imply that the dollar’s value is stable even when one foreign country unilaterally sells its U.S. assets. However, a weakening global demand for U.S. assets of the same magnitude as the early 2000s could significantly depreciate the dollar.

The United States (US) seems safe relative to the rest of the world (ROW). Her macro quantities, asset prices and wealth share all rise relative to the ROW during global downturns. These novel US safety facts challenge the traditional view that the US exorbitant privilege, the large average excess returns on the US external portfolio, is a risk premium that compensates the US for her role as the global insurance provider. Furthermore jointly accounting for countercyclical dollar and global risk premium dynamics alongside the US exorbitant privilege requires the US to suffer a worse recession than the ROW during global downturns, an implication also at odds with these facts. To resolve this puzzle, I emphasise a novel source of US specialness: her excess fiscal capacity vis-a-vis the ROW. I study the joint dynamics between the US fiscal condition, global innovation and growth, international risk-sharing, the dollar and global risk premia in a quantitative model with risk-sensitive preferences that takes this excess US fiscal capacity as given. The framework quantitatively resolves the US safety puzzle, as well as other stylised facts in international macro-finance. These results therefore tie the excess US fiscal capacity to key puzzling phenomena within the modern global financial system, a novel insight that has received surprisingly little emphasis thus far and has important implications for policy moving forward