Exorbitant Privilege Gained and Lost: Fiscal Implications

Zefeng Chen, Zhengyang Jiang, Hanno Lustig, Stijn Van Nieuwerburgh and Mindy Xiaolan

No 17340, CEPR Discussion Papers from Centre for Economic Policy Research

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, even after accounting for the seigniorage revenue from convenience yields. 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.

Keywords: Fiscal; policy (search for similar items in EconPapers)
JEL-codes: E62 G12 (search for similar items in EconPapers)
Date: 2022-05
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Journal Article: Exorbitant Privilege Gained and Lost: Fiscal Implications (2025)
Working Paper: Exorbitant Privilege Gained and Lost: Fiscal Implications (2022)
Working Paper: Exorbitant Privilege Gained and Lost: Fiscal Implications (2022)
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