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Comments and helpful thoughts are gratefully acknowledged from Serkan Arslanalp, Max Fandl, Martine Guerguil, Manmohan Kumar, Andre Meier, Christian Schmieder, Tobias Wickens, and participants at the IMF seminar. I would also like to thank Petra Dacheva and Carsten Jung for outstanding research assistance.
Besides the aggregate euro area, the following member countries are included: France, Germany, Greece, Ireland, Italy, Portugal, and Spain.
See, for instance, Krishnamurthy and Vissing-Jorgensen (2010) on the demand for U.S. Treasury bonds; Gagnon et al. (2010) on the supply of government bonds and quantitative easing in the U.S.; Beltran et al. (2012) on foreign demand for U.S. Treasury bonds; or Greenwood and Vayanos (2009) on U. K. pension fund regulations. Also, the paper complements the literature that focuses on external debt, which largely corresponds to non-resident debt holdings. See Peters (2002) for an overview of the empirical literature using external debt as determinant of emerging market debt crises.
Empirical investigations indicate that statutory purchases of up to 15 percent of the outstanding debt stock have a rather moderate impact of 20 to 100 basis points in the short run while long-run effects are usually lower. See D’Amico and King (2010), Gagnon et al. (2010), Krishnamurthy and Vissing-Jorgensen (2011), Neely (2010), or Joyce et al. (2010), among others.
Previous studies on foreign investment flows into emerging markets have found a strong relationship with macroeconomic and institutional factors. See Bekaert and Harvey (2003) for an overview of the literature.
Holdings of the public sector include holdings of the all levels of the government, social security funds, and state-owned entities, such as the domestic central bank and public pension funds which are classified as financial sector in ESA95. Data on central bank holdings are available for all countries except for Korea, Greece, Ireland, and Spain. While other intragovernmental holdings are often available for other countries, social security and public pension fund holdings are readily available only for Canada and Japan. For the United States, the data are sourced from the United States Social Security Administration (www.ssa.gov).
See Annex 1.2, “Compilation of Investor Base Data for General Government Debt” in IMF (2011c).
A draft “Public Sector Debt Statistics: Guide for Compilers and Users,” has been made available in May 2011, http://www.tffs.org/PSDStoc.htm. See IMF (2011d).
As data in this paper are presented on an unconsolidated basis where available, intragovernmental holdings are included, in contrast with the common practice. The difference is particularly noteworthy in the United States, where the Social Security Trust Fund holds about 20 percent of outstanding U.S. Treasuries. Intragovernmental holdings in Korea are likely to present only part of holdings by state-owned enterprises.
Note that not all reserve assets may be invested in government bonds. Also, COFER data on the currency composition of international reserves cover only about half of total reserves. U.S. TIC data may also understate actual foreign reserve holdings (Bertraut et al., 2006).
In Italy, domestic banks hold a significant amount of other Italian government debt (6 percent of total assets) in addition to Italian government securities (7 percent of total assets).
See IMF (2011d), pp. 12ff, for the characteristics that determine the classification.
For instance, in 1997 France assumed pension liabilities from France Telecom, which in turn transferred EUR5.7 billion to the government, accounted for as revenues. In 2010, Portugal undertook a similar transaction from Portugal Telecom for EUR2.6 billion. Other countries undertook related transactions.
A large body of literature exists for the closely related topic of sudden stops of capital flows to emerging markets. See, among others, Calvo (1998).
Diversification through foreign investments is the preposition of a large literature on international applications of portfolio models such as the CAPM. Transaction costs, differences in taxation and hedging, as well as asymmetric information are factors inhibiting full international diversification. See, among others, Burger and Warnock (2006) or Lane (2006).
Also, Krishnamurthy and Vissing-Jorgensen (2008) show that a lower relative supply of Treasuries is associated with wider credit risk spreads.
Including the portfolio weight as proxy for the saturation does not result in a coefficient significantly different from zero in the regressions presented in the remainder of this paper. Yet, the possible endogeneity of investment savings motivate the complementary use of a VAR analysis in the following section.
Public sector holdings include central banks. Private non-bank financial institutions refer to other financial intermediaries and financial auxiliaries, and insurance corporations and pension funds unless these institutions belong to the public sector, if data are available.
See, among others, Gagnon et al., 2010; D’Amico and King, 2010; Krishnamurthy and Vissing-Jorgensen, 2011; and Joyce et al., 2010. For a more complete discussion to contrast the results from these studies on central banks’ large-scale asset purchases to other changes in bond holdership, see Beltran et al. (2012), pp. 14ff.
The hypothesis that the yield changes do not induce changes in non-resident holdings (no pull effect) is rejected for Australia, Greece, Ireland, and Spain at a 5 percent confidence level and for Canada at a 10 percent confidence level. In turn, the hypothesis that changes in non-resident holdings do not induce yield changes (no push effect) is rejected for France, Germany, and Spain at a 5 percent confidence level and Ireland at a 10 percent confidence level.
The tests reject the null hypothesis that institutional sector holdings are not induced by yields (no pull effect) for Italy (at a 5 percent confidence level) and Germany (at a 10 percent confidence level). The hypothesis of no push effect is rejected for France, Germany, and Spain (at a 5 percent confidence level) and Ireland (at a 10 percent confidence level).
The relative short time series prohibits the use of a crisis-subsample that could be compared to the pre-crisis period.
As mentioned previously, this assumption looses appeal as reserve management is increasingly executed in the same way as private investment management. See Papaioannou et al. (2006) and Borio et al. (2008).
The U.S. Treasury Office of Debt Management estimated in 2011 that regulatory reforms could add US$675 billion of demand for treasury bonds owing to Basel III liquidity regulation for banks, and US$425 billion owing to Dodd-Frank and FASB reforms for pension and insurance funds. This total corresponds to 7 percent of outstanding treasury bonds and 0.8 percent of the total market portfolio in 2011. See U.S. Treasury (2011).