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The demand for government debt

Author

Listed:
  • Egemen Eren
  • Andreas Schrimpf
  • Dora Xia

Abstract

We document that the sectoral composition and marginal buyers of government debt differ notably across jurisdictions and have evolved significantly over time. Focusing on the United States, we estimate the yield elasticity of demand across sectors using instrumental variables constructed from monetary policy surprises. Our estimates point to a 11% increase in the demand by non-central-bank players for a 1 percentage point increase in long-term yields. Hence, a hypothetical reduction in the central bank balance sheet of around $215 billion increases longterm yields by 10 basis points. We find commercial banks, foreign private investors, pension funds, investment funds, and insurance companies to be the sectors whose demand is most sensitive to changes in long-term yields, but to varying degrees. Heterogeneous elasticities imply compositional shifts in the holders of government debt as central banks normalize balance sheets, which has policy implications.

Suggested Citation

  • Egemen Eren & Andreas Schrimpf & Dora Xia, 2023. "The demand for government debt," BIS Working Papers 1105, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1105
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    More about this item

    Keywords

    government debt; demand; yield elasticity; quantitative easing; quantitative tightening;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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