Working Paper: CEPR ID: DP17340
Authors: Zefeng Chen; Zhengyang Jiang; Hanno Lustig; Stijn van Nieuwerburgh; Mindy Xiaolan
Abstract: 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.
Keywords: Fiscal Policy
JEL Codes: G12; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| UK's status as a global safe asset supplier (F30) | UK fiscal capacity (H69) |
| UK fiscal practices (E62) | UK ability to attract global investors (F21) |
| UK macro fundamentals (E66) | UK debt backing by future surpluses after WWII (H63) |
| UK's deteriorating macroeconomic fundamentals (E66) | UK debt backing by future surpluses (H68) |
| US fiscal policy (E62) | market perceptions of US fiscal sustainability (E62) |
| relative macro fundamentals of a country (F31) | deviations in borrowing capacity (G51) |