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Exorbitant Privilege Gained and Lost: Fiscal Implications

Author

Listed:
  • Zefeng Chen
  • Zhengyang Jiang
  • Hanno Lustig
  • Stijn Van Nieuwerburgh
  • Mindy Z. Xiaolan

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.

Suggested Citation

  • Zefeng Chen & Zhengyang Jiang & Hanno Lustig & Stijn Van Nieuwerburgh & Mindy Z. Xiaolan, 2025. "Exorbitant Privilege Gained and Lost: Fiscal Implications," Journal of Political Economy, University of Chicago Press, vol. 133(12), pages 3713-3761.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/738149
    DOI: 10.1086/738149
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    2. Zhengyang Jiang & Hanno Lustig & Stijn Van Nieuwerburgh & Mindy Z. Xiaolan, 2024. "What Drives Variation in the U.S. Debt‐to‐Output Ratio? The Dogs that Did not Bark," Journal of Finance, American Finance Association, vol. 79(4), pages 2603-2665, August.
    3. Zhengyang Jiang, 2024. "Exorbitant Privilege: A Safe-Asset View," CESifo Working Paper Series 11279, CESifo.
    4. Korevaar, Matthijs, 2023. "Reaching for yield and the housing market: Evidence from 18th-century Amsterdam," Journal of Financial Economics, Elsevier, vol. 148(3), pages 273-296.
    5. Yang, Bohan & Wang, Bin, 2024. "The time-varying U.S. treasury bond demand elasticity," Economics Letters, Elsevier, vol. 241(C).
    6. Thomas M. Eisenbach & Gregory Phelan, 2023. "Fragility of Safe Assets," Working Papers 23-02, Office of Financial Research, US Department of the Treasury.
    7. Gomez-Gonzalez, Patricia & Mathy, Gabriel, 2025. "The world’s first global safe asset: British public debt, 1718-1913," Explorations in Economic History, Elsevier, vol. 97(C).
    8. Thomas M. Eisenbach & Gregory Phelan, 2022. "Fragility of Safe Asset Markets," Staff Reports 1026, Federal Reserve Bank of New York.
    9. Marijn A Bolhuis & Jakree Koosakul & Neil Shenai, 2025. "Fiscal R-Star: Fiscal-Monetary Tensions and Implications for Policy," RBA Annual Conference Papers acp2025-05, Reserve Bank of Australia, revised Nov 2025.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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