Yuanchen Bing, Ph.D.

Committee: Victor J. Valcarcel (Chair), Daniel G. Arce, Kurt Beron, Enrique Martínez García

Job Market Paper: A Financial Mechanism for Foreign-Denominated Reserves in Advanced Economies (with Victor J. Valcarcel)

John P. Rust Best Paper Award in the 50th Eurasia Business and Economics Society (EBES) — Lisbon Conference

Abstract: Research on international reserves largely focuses on their relationship with exchange rates, rather than domestic interest rates. Candidate explanations have mostly con-centrated on emerging economies. We innovate by advancing a financial mechanism that is more closely connected with the large-scale asset purchase (LSAP) programs the central banks of several advanced economies implemented since the Great Financial Crisis (GFC) of 2007. Expansionary shocks in international reserve holdings tend to be contractionary for short-term yields in the UK, Canada, Switzerland, and Japan. Our nonlinear framework suggests the transmission of international reserves shocks onto domestic yields is regime dependent. Our analysis finds a preponderance of evidence that: (i) the onset of GFC in all four countries, (ii) the negative policy rate periods in Switzerland and Japan in the mid 2010s, and (iii) the quantitative tightening efforts Bank of England and Bank of Canada began in 2022 all had material effects on the transmission of international reserve shocks onto domestic interest rates.

The Effects of Monetary Policy on Foreign Reserves

Abstract: The last two decades were characterized by a rapid growth in international reserves hold-ings by many central banks around the world. Yet, there is effectively little in the way of a theoretical framework that explains how foreign reserves respond to monetary policy shocks. In this paper, I develop a theoretical framework that explains international reserves holdings of various small open economies from a financial stability perspective, which motivates an empirical investigation. I identify a “Taylor-type” monetary feedback rule using a structural vector-autoregression (SVAR) framework that assumes policy makers adjust their monetary policy instruments based on the level of foreign reserves they hold. Specifically, I consider two types of monetary policy settings: interest rate-based and exchange rate-based. Beginning with a domestic specification, I first investigate whether the response of international reserves to monetary policy shocks behaves according to the theoretical model I propose. Subsequently, I extend my SVAR to include monetary variables from United States, investigating the extent to which external factors from a large economy alter the behavior of international reserve hold-ings. Various specifications of my SVAR model consistently show that international reserves respond positively to monetary policy shocks identified with hikes in the domestic short-term rate and nominal exchange rate. Additionally, I measure the influence of U.S. domestic re-serves on foreign reserves holdings of these small open economies.

Club Convergence in International Reserve Hoarding

 A Domestic Monetary Transmission Channel for International Reserves 

Econ 2301: Principles of Macroeconomics

Econ 3311: Intermediate Macroeconomic Theory

Econ 3310: Intermediate Microeconomic Theory

ECON 3311: Intermediate Macroeconomic Theory

ECON 4832: International Finance

ECON 6302: Microeconomic Theory (PhD Core)

ECON 4385/ECON 5397: Business and Economic Forecasting (with R)

Undergrad level:                                                                                                      Graduate level:

Principles of Macroeconomics                                             Monetary Economics                                           

Intermediate Macroeconomic Theory Macroeconomics Theory

International Finance Applied Time Series

Money and Banking Financial Econometrics

International Economics

Business Forecasting