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Author(s)

Zhengyang Jiang

When the US fiscal condition is strong, the dollar is strong, has a high forward discount, and continues to appreciate in the next 2 years. I propose a framework to decompose the dollar's real exchange rate, and show these patterns imply that a stronger fiscal condition lowers the US investors' short-run risk premium but raises their long-run risk premium. This comovement is supported by evidence from the term structure of stock risk premia, bond risk premia, and cross-border capital flows. It highlights the US fiscal cycle as the key state variable for understanding the dollar and the US investors' risk premium.
Date Published: 2021
Citations: Jiang, Zhengyang. 2021. US Fiscal Cycle and the Dollar. Journal of Monetary Economics.