Sustainability, Premia, and the Dollar

Abstract

This paper models the effects of foreign investors imposing a limit on the proportion of U.S. liabilities they are prepared to hold in their portfolios. Simulations show that actual premiums required on dollar assets implied by such a limit will be small. Nevertheless, such small premiums can play a quantitatively important role in preventing large buildups of claims on the United States. Moreover, the costs of such an imposed adjustment can be substantial in terms of private consumption, investment and output in the United States.