The Macroeconomic Implications of Us Market Power in Safe Assets

69 Pages Posted: 5 Dec 2022 Last revised: 9 Jun 2024

See all articles by Jason Choi

Jason Choi

University of Wisconsin - Madison

Rishabh Kirpalani

University of Wisconsin - Madison

Diego Perez

New York University (NYU) - Department of Economics

Date Written: December 2022

Abstract

The US government is the dominant supplier of global safe assets and faces a downward-sloping demand for its debt. In this paper, we ask if the US exercises its market power when issuing debt and study its macroeconomic consequences. We develop a model of the global economy in which US public debt generates a non-pecuniary value for its holders, analyze the equilibrium in which the US government is the monopoly provider of this safe asset, and contrast this case with the one in which the US government acts as a price taker. We use variation in estimated demand elasticities for US debt during high- and low-volatility regimes to empirically distinguish between these two models and find that the data reject the price-taking behavior in favor of the monopoly one. We then quantify the distortions due to market power and find that it generates a significant underprovision of safe assets, a sizable markup in the convenience yield, and large welfare benefits for the US to the detriment of the rest of the world. Finally, we study the implications of increasing competition in safe assets from other sovereigns and private institutions.

Suggested Citation

Choi, Jason and Kirpalani, Rishabh and Perez, Diego J., The Macroeconomic Implications of Us Market Power in Safe Assets (December 2022). NBER Working Paper No. w30720, Available at SSRN: https://ssrn.com/abstract=4293633

Jason Choi (Contact Author)

University of Wisconsin - Madison ( email )

Rishabh Kirpalani

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Diego J. Perez

New York University (NYU) - Department of Economics ( email )

19 West 4th Street
New York, NY 10012
United States

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