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Exorbitant Privilege Gained and Lost: Fiscal Implications

86 Pages Posted: 5 May 2022 Last revised: 11 Dec 2024

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

There 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, it can issue more debt than what is justified by its future primary surpluses, even after accounting for seigniorage revenue from convenience yields on the debt. 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. After losing their exorbitant privilege, their debt was fully backed by primary surpluses. We conclude that exorbitant privilege derives from the ability to issue overpriced government debt in the early stage, followed by bondholder losses and financial repression in the later stage.

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

JEL Classification: G12, H63

Suggested Citation: 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
United States

Hanno N. Lustig (Contact Author)

Stanford Graduate School of Business ( email )

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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business ( email )

3022 Broadway
Uris Hall 809
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 )

BIZ 2 Storey 4, 04-05
1 Business Link
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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