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Exorbitant Privilege Gained and Lost: Fiscal Implications

Author

Listed:
  • Chen, Zefeng

    (Peking University)

  • Jiang, Zhengyang

    (Kellogg School of Management - Department of Finance; National Bureau of Economic Research)

  • Lustig, Hanno N.

    (Stanford Graduate School of Business; National Bureau of Economic Research)

  • Van Nieuwerburgh, Stijn

    (Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); ABFER)

  • Xiaolan, Mindy Z.

    (University of Texas, Austin - Department of Finance)

Abstract

We study three centuries of U.K. fiscal history. Before WW-I, when the U.K. dominated global bond markets, the U.K.'s government debt was not always fully backed by its future surpluses. As predicted by theories of safe asset determination, investors concentrate extra fiscal capacity in a single country, the global safe asset supplier, based on relative macro fundamentals, and its debt growth may temporarily outstrip what is warranted by its own macro fundamentals. After the relative deterioration in U.K. fundamentals, due to the run-up in debt during WW-I and WW-II, bond investors focused exclusively on the U.K's own macro fundamentals. Since then the U.K. debt has been fully backed by surpluses.

Suggested Citation

  • Chen, Zefeng & Jiang, Zhengyang & Lustig, Hanno N. & Van Nieuwerburgh, Stijn & Xiaolan, Mindy Z., 2022. "Exorbitant Privilege Gained and Lost: Fiscal Implications," Research Papers 4020, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:4020
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    Cited by:

    1. Zhengyang Jiang & Hanno Lustig & Stijn Van Nieuwerburgh & Mindy Z. Xiaolan, 2024. "What Drives Variation in the U.S. Debt‐to‐Output Ratio? The Dogs that Did not Bark," Journal of Finance, American Finance Association, vol. 79(4), pages 2603-2665, August.
    2. Zhengyang Jiang, 2024. "Exorbitant Privilege: A Safe-Asset View," CESifo Working Paper Series 11279, CESifo.
    3. Korevaar, Matthijs, 2023. "Reaching for yield and the housing market: Evidence from 18th-century Amsterdam," Journal of Financial Economics, Elsevier, vol. 148(3), pages 273-296.
    4. Yang, Bohan & Wang, Bin, 2024. "The time-varying U.S. treasury bond demand elasticity," Economics Letters, Elsevier, vol. 241(C).
    5. Thomas M. Eisenbach & Gregory Phelan, 2022. "Fragility of Safe Asset Markets," Staff Reports 1026, Federal Reserve Bank of New York.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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