Optimal Foreign Reserves, The Dollar Trap and Demand for Global Safe Assets: A DSGE analysis for China

The recent surge of foreign reserves in emerging markets has sparked fierce debate about what level of reserves is the optimal amount for a country. Conventional models have achieved important advances in understanding the behaviour of central banks’ reserve policy, but fail to find convincing solutions to the puzzle of why emerging economies, and China in particular, would continue to accumulate massive reserves. With reference to China’s massive hoarding of foreign reserves, this thesis develops a representative agent model with elements of dynamic stochastic general equilibrium (DSGE) modelling. The model constructed in this thesis explicitly considers the risky steady state as the equilibrium point when agents take into account future uncertainty but when the shock realizations are zero. In this risky steady state we derive the optimal reserves for emerging markets, with particular reference to the Chinese case. The precautionary savings motivation for holding reserves is then analysed within this framework. This thesis derives the optimality of Chinese reserve accumulation, and provides a plausible explanation for reserve build-up in China and its underlying driving forces. In order to better understand the foreign reserves accumulation, this thesis further attempts to analyse current external wealth allocation in a portfolio perspective within a DSGE framework. A two-country model is employed, and a Value at Risk (VaR) constraint is introduced to reproduce the risk averse behaviour of investors. After accounting for risk diversification, our findings imply that an investor would shift their portfolio holding to bond related assets. Finally, China has accumulated a huge amount of foreign reserves. The majority of these assets are denominated in the US dollar. Furthermore, in terms of asset type, the US T-bill is the dominant investment instrument in China’s international portfolio choice. This raises questions as to why the central bank of China chooses to make such an investment decision, and what the global repercussions might be. Therefore, China’s role in the growing demand for global safe assets deserves exploration. Given the world-wide shortage of global safe assets, to what extent China will continue the current international investment decision, and the driving forces behind such policy inertia, are major concerns. In order to gain a better understanding, this thesis applies a global solving method, as well as a standard local solving method

Large-Alphabet Encoding Schemes for Floodlight Quantum Key Distribution

Floodlight quantum key distribution (FL-QKD) uses binary phase-shift keying (BPSK) of multiple optical modes to achieve Gbps secret-key rates (SKRs) at metropolitan-area distances. We show that FL-QKD's SKR can be doubled by using 32-ary PSK.Comment: 2 pages, 2 figure

Entanglement-Enhanced Lidars for Simultaneous Range and Velocity Measurements

Lidar is a well known optical technology for measuring a target's range and radial velocity. We describe two lidar systems that use entanglement between transmitted signals and retained idlers to obtain significant quantum enhancements in simultaneous measurement of these parameters. The first entanglement-enhanced lidar circumvents the Arthurs-Kelly uncertainty relation for simultaneous measurement of range and radial velocity from detection of a single photon returned from the target. This performance presumes there is no extraneous (background) light, but is robust to the roundtrip loss incurred by the signal photons. The second entanglement-enhanced lidar---which requires a lossless, noiseless environment---realizes Heisenberg-limited accuracies for both its range and radial-velocity measurements, i.e., their root-mean-square estimation errors are both proportional to $1/M$ when $M$ signal photons are transmitted. These two lidars derive their entanglement-based enhancements from use of a unitary transformation that takes a signal-idler photon pair with frequencies $\omega_S$ and $\omega_I$ and converts it to a signal-idler photon pair whose frequencies are $(\omega_S + \omega_I)/2$ and $\omega_S-\omega_I$. Insight into how this transformation provides its benefits is provided through an analogy to superdense coding.Comment: 7 pages, 3 figure