Addicted to Debt: Foreign Purchases of U.S. Treasuries and the Term Premium

David Kohn

No 480, Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile.

Abstract: This paper investigates the effect of purchases of U.S. Treasury bonds by foreigners on long-term yields and the term-premium. I set up a consumption-based model with habit preferences, calibrate it to match the average slope of the yield curve in the U.S., and find that foreign purchases decreased long-term yields significantly over the period prior to the financial crisis. Half of this change is explained by a drop in the term-premium: in the model, foreign purchases increase domestic agents' consumption above their habit, thus reducing their risk-aversion and decreasing the term-premium. Finally, I investigate the potential impact of a sell-off of U.S. Treasuries by foreigners. I show that such a reversal of foreign inflows would result in a sharp increase in the term-premium and, thus, in long-term yields.

JEL-codes: E43 E44 G12 G15 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-his and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Addicted to Debt: Foreign Purchases of U.S. Treasuries and the Term-Premium (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ioe:doctra:480

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