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Foreign official holdings of US treasuries, stock effect and the economy: a DSGE approach


  • Francois John Nana

    () (West Texas A&M University, Department of Economics, 2501 4th Avenue,Canyon, United States of America)


This paper examines the effects of shocks to foreign official holdings of long-term U.S. Treasuries (FOHL) on macroeconomic aggregates using a dynamic general equilibrium model. The model treats short- and long-term bonds as imperfect substitutes through endogenous portfolio adjustment frictions. This provides a channel for changes in relative supply of assests to influence asset prices. Three key findings emerge: (1) positive shocks to FOHL impact the long-term interest rate and the term spread negatively through a stock effect channel – defined as persistent changes in interest rates as a result of movement along the Treasury demand curve. This result is consistent with findings in the empirical literature. (2) Through a feedback mechanism from an endogenous term structure in the model, the decline in the long-term interest rate induces an expansion in economic activity which leads to an increase in consumption, output and inflation. Both the stock effect and the feedback mechanism are generated by the portfolio frictions. (3) Higher degrees of persistence of FOHL shocks or imperfect asset substitution generate a prolonged negative stock effect following shocks to FOHL. This causes a longer delay of the term spread to return to its steady state after it falls; hence, inducing an extended and stronger stimulative feedback effect from the endogenous term structure into the modeled economy. These findings help explain macroeconomic events such as the so-called ``Greenspan conundrum'' of the mid 2000s.

Suggested Citation

  • Francois John Nana, 2020. "Foreign official holdings of US treasuries, stock effect and the economy: a DSGE approach," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(1), pages 1-28, January.
  • Handle: RePEc:bpj:bejmac:v:20:y:2020:i:1:p:28:n:6

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    More about this item


    DSGE; Foreign Official Holdings of US Treasuries; Imperfect Asset Substitution; Near-Structural VARs; Portfolio Adjustment Costs;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates


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