Exorbitant Privilege Gained and Lost: Fiscal Implications
55 Pages Posted: 5 May 2022 Last revised: 10 May 2022
Date Written: April 28, 2022
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.
Keywords: exorbitant privilege, fiscal capacity
JEL Classification: G12, H63
Suggested Citation: Suggested Citation