Foreign Treasury Purchases and the Yield Curve: Evidence from a Sign-Identified Vector Autoregression

48 Pages Posted: 7 Dec 2014

See all articles by Christopher Martin

Christopher Martin

Federal Deposit Insurance Corporation (FDIC)

Date Written: December 4, 2014

Abstract

I employ a sign-identified vector autoregression (VAR) in foreign Treasury purchases and factors of the yield curve to estimate the dynamic impacts of foreign Treasury purchases on Treasury yields. Although a growing literature studies this question, it does not adequately address the endogeneity of foreign Treasury purchases to yields; not only can purchases affect yields, but yields can affect purchases. I achieve identification using sign identification and estimate effects which are larger than in most of the existing literature, but which roughly match results from event studies. This fact suggests that I successfully overcome endogeneity. Additionally, I decompose the behavior of long rates into the responses of term premia and expected future short rates. Following foreign Treasury purchases, term premia persistently and substantially decline while short rates rise with a substantial lag. This suggests that the Federal Reserve tightens policy in response to foreign purchases, but still allows a loosening of credit conditions.

Keywords: foreign Treasury purchases, capital flows, yield curve, term premium, sign identification

JEL Classification: F41, E43, F37, E58

Suggested Citation

Martin, Christopher, Foreign Treasury Purchases and the Yield Curve: Evidence from a Sign-Identified Vector Autoregression (December 4, 2014). Available at SSRN: https://ssrn.com/abstract=2534430 or http://dx.doi.org/10.2139/ssrn.2534430

Christopher Martin (Contact Author)

Federal Deposit Insurance Corporation (FDIC) ( email )

550 17th Street NW
Washington, DC 20429
United States

HOME PAGE: http://sites.google.com/site/chrismartin122/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
35
Abstract Views
413
PlumX Metrics