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Journal of Political Economy Vol. 133 No. 12 2025

Exorbitant Privilege Gained and Lost: Fiscal Implications

Zefeng Chen1; Zhengyang Jiang2; Hanno Lustig3,4; Stijn Van Nieuwerburgh; Mindy Z. Xiaolan5

1 Peking University · 2 National Bureau of Economic Research · 3 Center for Economic and Policy Research · 4 Economic Policy Institute · 5 The University of Texas at Austin

Abstract

We study three centuries of fiscal history. Dominant safe asset suppliers issue more debt than future primary surpluses can justify, even after accounting for seigniorage revenue from convenience yields. This pattern holds for the Dutch Republic (seventeenth to eighteenth centuries), the United Kingdom (eighteenth to nineteenth centuries), and the United States (twentieth to twenty-first centuries). When Dutch and UK fiscal fundamentals deteriorated, they lost their dominant position as the safe asset supplier, and their debt became fully backed by primary surpluses. Exorbitant privilege stems from issuing overpriced debt in the early stage, followed by bondholder losses and financial repression in the later stage.

DOI
10.1086/738149
Volume
133
Issue
12
Pages
3713-3761
Language
en
Sources
semanticscholar openalex crossref

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