Exorbitant Privilege Gained and Lost: Fiscal Implications

78 Pages Posted: 5 May 2022 Last revised: 10 Jun 2023

See all articles by Zefeng Chen

Zefeng Chen

Peking University - Guanghua School of Management, Department of Finance

Zhengyang Jiang

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

Hanno N. Lustig

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

Stijn Van Nieuwerburgh

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

Mindy Z. Xiaolan

University of Texas, Austin - Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: April 28, 2022

Abstract

We study three centuries of U.K., U.S. and Dutch fiscal history. When a country is the dominant safe asset supplier, its sovereign debt is more expensive relative to other sovereign debt, and it can issue more debt than what is justified by its future primary surpluses. This pattern holds for the Dutch Republic in the 17th and 18th, the U.K. in the 18th and 19th, and the U.S. in the 20th and 21st centuries. When the Dutch Republic's and the U.K.'s fiscal fundamentals deteriorated, they lost their dominant position as the safe asset supplier. Since then, their debt has been fully backed by their primary surpluses. These results support theories of safe asset determination in which investors concentrate extra fiscal capacity in a single safe asset supplier based on relative macro fundamentals, allowing its debt to exceed its fiscal backing.

Keywords: bond pricing, fiscal policy, term structure, convenience yield, exorbitant privilege

JEL Classification: G12, H63

Suggested Citation

Chen, Zefeng and Jiang, Zhengyang and Lustig, Hanno N. and Van Nieuwerburgh, Stijn and Xiaolan, Mindy Z., Exorbitant Privilege Gained and Lost: Fiscal Implications (April 28, 2022). Available at SSRN: https://ssrn.com/abstract=4096091 or http://dx.doi.org/10.2139/ssrn.4096091

Zefeng Chen

Peking University - Guanghua School of Management, Department of Finance ( email )

Beijing, Beijing 100871
China
021-62747646 (Phone)

Zhengyang Jiang

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

HOME PAGE: http://sites.google.com/site/jayzedwye/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Hanno N. Lustig (Contact Author)

Stanford Graduate School of Business ( email )

Stanford GSB
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Stanford, CA California 94305-6072
United States
3108716532 (Phone)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Stijn Van Nieuwerburgh

Columbia University Graduate School of Business ( email )

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New York, NY New York 10027
United States

HOME PAGE: http://https://www0.gsb.columbia.edu/faculty/svannieuwerburgh/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

ABFER ( email )

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Singapore, 117592
Singapore

Mindy Z. Xiaolan

University of Texas, Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

HOME PAGE: http://sites.google.com/view/mindyxiaolan

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