Working Paper: NBER ID: w30059
Authors: Zefeng Chen; Zhengyang Jiang; Hanno Lustig; Stijn van Nieuwerburgh; Mindy Z. 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: No keywords provided
JEL Codes: E43; E62; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| UK's historical debt levels (H63) | fiscal capacity (E62) |
| UK's status as a safe asset supplier (F34) | lower yields on UK government debt (H63) |
| UK's fiscal capacity (H69) | ability to issue debt (H74) |
| post-WWII situation (P17) | UK debt fully backed by future surpluses (H68) |
| US borrowing (H74) | gap between debt and fiscal capacity (H69) |
| UK's historical context (N93) | insights into US fiscal situation (H68) |