Dollar Reserves and U.S. Yields: Identifying the Price Impact of Official Flows

Abstract

This paper shows that the impact of foreign official demand for USTs on U.S. yields is much larger when critical sources of endogeneity are addressed. We exploit changes in the volatility of foreign official UST flows before and after the 2008 Global Financial Crisis to identify a VAR of U.S. yields via heteroskedasticity. A foreign official flow shock of $100B moves 5-year, 10-year, and 30-year yields by more than 100 basis points on impact, converging to the range of estimates previously reported in the literature within 6 months.

Keywords: Capital flows; Global factors; Global savings glut; International reserves; Monetary policy; Yield curve

JEL Classification: E43, E44, F21, F30, G10