The reserve currency and the liquidity demand for safe assets

I propose a dynamic model of the reserve currency paradigm that centers on the liquidity demand for safe assets. In global recessions, the demand for the U.S. safe bond increases and raises its convenience yield, giving rise to a stronger dollar and a countercyclical seigniorage revenue. The seigniorage revenue raises the U.S. wealth and consumption shares in recessions, despite the U.S. suffering portfolio losses from its external positions. This asset demand channel also connects exchange rate dynamics to the marginal utility over bond holding, which provides new perspectives on exchange rate disconnect and on the relationship between exchange rates and capital flows. Under this safe-asset view, exorbitant privilege does not require exorbitant duty.

That is from a new NBER working paper by Zhengyang Jiang.  And here is some relevant data on the increase in dollar holdings around the globe.