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ESSAYS ON INTEREST RATE DETERMINATION IN OPEN ECONOMIES
by
Jesus Antolin Sierra-Jimenez
A Dissertation Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(BUSINESS ADMINISTRATION)
August 2009
Copyright 2009 Jesus Antolin Sierra-Jimenez
Object Description
| Title | Essays on interest rate determination in open economies |
| Author | Sierra Jimenez, Jesus Antolin |
| Author email | jesus.sierra@marshall.usc.edu; jasierraji@gmail.com |
| Degree | Doctor of Philosophy |
| Document type | Dissertation |
| Degree program | Business Administration |
| School | Marshall School of Business |
| Date defended/completed | 2009-05-04 |
| Date submitted | 2009 |
| Restricted until | Unrestricted |
| Date published | 2009-06-26 |
| Advisor (committee chair) | Zapatero, Fernando |
| Advisor (committee member) |
Jones, Christopher S. Quadrini, Vincenzo Betts, Caroline M. Protopapadakis, Aris |
| Abstract | This thesis examines how government accumulation of foreign exchange reserves affect interest rates in an open economy. In the first essay, I examine this issue from an empirical perspective. I estimate the impulse response of the 10 year Treasury yield to an exogenous innovation in Foreign Official Holdings of U.S. Long Term Treasury securities in an identified VAR model. I find that a market valuation adjustment done to the data is behind a seemingly negative effect of holdings on yields, and that once we control for this adjustment, the effect is not negative. Hence, I find no conclusive evidence of a negative effect on U.S. interest rates from foreign official accumulation of treasury bonds. In the second essay, I analyze the same question from a theoretical perspective. I present a two-country dynamic stochastic general equilibrium model in which central banks accumulate reserves and investigate whether the impulse response of one country’s interest rate is significantly negative after an exogenous shock to the other country’s foreign exchange reserve policy. I find that even in a world in which Uncovered Interest Parity (UIP) does not hold, which renders different currency assets imperfect substitutes, the response of the foreign interest rate to a home country reserve accumulation shock is likely to be negative but small in magnitude. In the third essay, I test for evidence on the mechanism used in the second essay to make different currency assets imperfect substitutes. Specifically, I estimate the elasticity of investments in foreign currencies with respect to expected excess returns. I find that currency flows help predict excess returns, and are statistically significant forecasting variables even in the presence of additional control variables. This means that demand for different currency assets is less than perfectly elastic, which lends support to the channel proposed in the second essay to introduce deviations from UIP. |
| Keyword | general equilibrium; two country model; perturbation methods; time-varying risk premia; foreign official holdings; foreign official intervention; VAR; impulse response function; imperfect financial integration; incomplete markets; financial friction; UIP |
| Language | English |
| Part of collection | University of Southern California dissertations and theses |
| Publisher (of the original version) | University of Southern California |
| Place of publication (of the original version) | Los Angeles, California |
| Publisher (of the digital version) | University of Southern California. Libraries |
| Provenance | Electronically uploaded by the author |
| Type | texts |
| Legacy record ID | usctheses-m2320 |
| Rights | Sierra Jimenez, Jesus Antolin |
| Repository name | Libraries, University of Southern California |
| Repository address | Los Angeles, California |
| Repository email | http://www.usc.edu/isd/libraries/services/ask_a_librarian/email/ |
| Filename | etd-Sierra-2976 |
| Archival file | uscthesesreloadpub_Volume48/etd-Sierra-2976.pdf |
Description
| Title | Page 1 |
| Full text | ESSAYS ON INTEREST RATE DETERMINATION IN OPEN ECONOMIES by Jesus Antolin Sierra-Jimenez A Dissertation Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree DOCTOR OF PHILOSOPHY (BUSINESS ADMINISTRATION) August 2009 Copyright 2009 Jesus Antolin Sierra-Jimenez |
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