Economics Webinar - Dollar Trinity

The global financial cycle, the global trade cycle, and the global business cycle are strongly correlated—not only with each other but also with the dollar exchange rate. The dollar tends to appreciate when the global cycles contract. We document these patterns in the data and show that the dollar is causal for the co-movement, as it shapes the international propagation of US monetary policy and global risk. We offer a structural account based on a two-country model of the world economy built around dollar trinity: the dollar is used to denominate safe assets, cross-border financial contracts, and trade invoicing.