Dollar Reserves and U.S. Yields: Identifying the Price Impact of Official Flows
67 Pages Posted: 18 Aug 2021 Last revised: 27 Nov 2023
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Dollar Reserves and U.S. Yields: Identifying the Price Impact of Official Flows
Dollar Reserves and U.S. Yields: Identifying the Price Impact of Official Flows
Date Written: August 13, 2021
Abstract
By exploiting changes in the volatility of U.S. Treasury yields and foreign official (FO) flows into U.S. Treasuries after the 2008 Global Financial Crisis, we identify a FO flow shock via heteroskedasticity in a structural VAR. We estimate that a $100B FO flow shock moves 5 and 10-year U.S. yields by about 100 basis points within a month. An event study of the intraday U.S. Treasury yield curve response to Japan's FX intervention in September 2022 validates our VAR estimates. Our findings imply that a 1% reduction in the Dollar share of China's reserves could raise long-term U.S. yields by about 20 basis points.
Keywords: Bayesian VARs; Foreign official flows; Global savings glut; Identification via heteroskedasticity; Interest rate conundrum; International reserves; U.S. Dollar; SVARs
JEL Classification: E43, E44, F21, F30, G10
Suggested Citation: Suggested Citation