Exorbitant Privilege Gained and Lost: Fiscal Implications
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.
We would like to thank Olivier Blanchard, Jesse Schreger and Jonathan Payne for helpful discussions. We gratefully acknowledge financial support from NSF award 2049260. We are grateful to George Hall and Tom Sargent for sharing historical data for the U.S. and to the Bank of England for doing the same for the U.K. We also gratefully acknowledge use of the J̀ordà-Schularick-Taylor Macrohistory database. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.