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The Safe-Debt Laffer Curve

Author

Listed:
  • Ricardo J. Caballero

Abstract

I study the long-run effects of public debt on net safe-asset supply. I construct a quarterly measure of marginal Treasury absorption cost that includes the premium on new debt and the cost of repricing the outstanding stock. Combining cash-Treasury and real-duration premia with estimates of their responses to supply, I estimate that this cost rose from 78 to 204 basis points between 2015Q1 and 2026Q2. In the model, absorption payments increase high-net-worth recipients’ demand for safe assets when consumption out of their capitalized value falls short of the payments themselves. As debt expands relative to financial capacity, this induced demand can exceed new issuance, producing a safe-debt Laffer curve. In an illustrative household calculation, the estimated cost increase reduces the marginal net contribution of issuance from 69 to 18 cents per dollar.

Suggested Citation

  • Ricardo J. Caballero, 2026. "The Safe-Debt Laffer Curve," NBER Working Papers 35687, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35687
    Note: EFG IFM ME PE
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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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