Exorbitant Privilege Gained and Lost: Fiscal Implications

56 Pages Posted: 23 May 2022 Last revised: 26 Oct 2022

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)

hlustig@stanford.edu Lustig

Stanford University

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: May 2022

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.

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Suggested Citation

Chen, Zefeng and Jiang, Zhengyang and Lustig, hlustig@stanford.edu and Van Nieuwerburgh, Stijn and Xiaolan, Mindy Z., Exorbitant Privilege Gained and Lost: Fiscal Implications (May 2022). NBER Working Paper No. w30059, Available at SSRN: https://ssrn.com/abstract=4117086

Zefeng Chen (Contact Author)

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 )

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Hlustig@stanford.edu Lustig

Stanford University

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business ( email )

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United States

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

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

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United Kingdom

ABFER ( email )

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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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