Conference Agenda
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Track T6-3: Monetary Policy
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A Model of U.S. Monetary Policy and the Global Financial Cycle 1Chicago Booth; 2Princeton University We propose a general equilibrium model in which U.S. monetary policy affects global risk premia by revaluing the wealth of currency-mismatched arbitrageurs. Assuming their portfolios are mean-variance efficient, arbitrageurs must be short the dollar. A U.S. tightening thus erodes arbitrageurs' 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, arbitrageurs' dollar funding and U.S. monetary policy spillovers are dampened.
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