Uphill Capital Flows and the International Monetary System

Abstract

Uphill capital flows constitute a key transmission channel through which reserve accumulation can distort the stability of the international monetary system. This paper examines and quantifies the importance of this transmission channel by examining how foreign official purchases of U.S. Treasuries influences the U.S. yield curve at different maturities. Our findings suggest that a percentage point increase in foreign official holdings relative to outstanding marketable securities reduces the term premium by 2.0–2.4 basis points at maturities of 2–3 years. These estimates are then used to gauge the role of a global policy in reducing excess reserve accumulation?e.g., a composite global reserve asset or through global liquidity facilities. Findings show that a policy that reduces the demand for Treasuries by $100 billion would increase yields by 1.5–1.8 basis points.

Reserve Currency Blocs: A Changing International Monetary System?

“…In such world, global growth for reserves is driven by deficitsnot necessarily balance of payment deficits but government deficits. See Farhi et al 2011, Obstfeld, 2011, and Csonto and Tovar, 2017. near the 45-degree line, which is indicative of a high degree of persistence in both measures of the dollar currency bloc.…”

“…A discussion of liquidity shortages of U.S. dollars at the height of the crisis is presented inMcGuire and Von Peter, (2009). For an analysis of the implications of uphill capital flows on the international monetary system seeCsonto and Tovar (2017). For an overview on how the reliance on a single currency may distort fiscal discipline seeFarhi et al (2011) andLandau (2013).…”

Financial Globalization and Inequality

“…Foreign official holdings of U.S. Treasuries increased from some US$200 billion in the early 1990s to US$4 trillion (around 30 percent of total marketable U.S. Treasury debt securities) in the mid-2010s. 13 The increase was driven by EMDCs, which accumulated reserves in two waves: during the pre-GFC period with either precautionary motives or on the back of high commodity prices, and during the post-GFC period as a result of foreign exchange interventions taken in response to surging capital inflows (Csonto and Tovar, 2017).…”

Financial Globalization

“…Reserve accumulation has been a major "uphill" capital flow from EMDCs to AEs. Foreign official holdings of US Treasuries increased from some US$200 billion in the early 1990s to US$4 trillion (around 30 percent of total marketable US Treasury debt securities) in the mid-2010s.13 The increase was driven by EMDCs, which accumulated reserves in two waves: during the pre-GFC period with either precautionary motives or on the back of high commodity prices, and during the post-GFC period as a result of foreign exchange interventions taken in response to surging capital inflows (Csonto and Tovar 2017).…”