The Flight to Safety and International Risk Sharing

We study a business cycle model of the international monetary system featuring a time -varying demand for safe dollar bonds , greater risk -bearing capacity in the United States than the rest of the world , and nominal rigidities. A flight to safety generates a dollar appreciation and decline in global output. Dollar bonds thus command a negative risk premium, and the United States holds a levered portfolio of capital financed in dollars. We quantify the effects of safety shocks and heterogeneity in risk -bearing capacity for global macroeconomic volatility, US external adjustment, and policy transmission , as of dollar swap lines.