Working Paper: NBER ID: w30720
Authors: Jason Choi; Rishabh Kirpalani; Diego J. Perez
Abstract: The US government is the dominant supplier of global safe assets and faces a downward-sloping demand for its debt. In this paper, we ask if the US exercises its market power when issuing debt and study its macroeconomic consequences. We develop a model of the global economy in which US public debt generates a non-pecuniary value for its holders, analyze the equilibrium in which the US government is the monopoly provider of this safe asset, and contrast this case with the one in which the US government acts as a price taker. We use variation in estimated demand elasticities for US debt during high- and low-volatility regimes to empirically distinguish between these two models and find that the data reject the price-taking behavior in favor of the monopoly one. We then quantify the distortions due to market power and find that it generates a significant underprovision of safe assets, a sizable markup in the convenience yield, and large welfare benefits for the US to the detriment of the rest of the world. Finally, we study the implications of increasing competition in safe assets from other sovereigns and private institutions.
Keywords: market power; safe assets; US debt; macroeconomic implications
JEL Codes: E6; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US government acts as a monopoly provider of safe assets (H63) | significant underprovision of global safe assets (F65) |
| market power of the US (L49) | sizable markup in the convenience yield (G19) |
| sizable markup in the convenience yield (G19) | large welfare benefits for the US (I38) |
| sizable markup in the convenience yield (G19) | welfare losses for the rest of the world (F69) |
| data rejects price-taking behavior (D41) | favors monopoly model (D42) |
| US government internalizes downward-sloping demand curve (H19) | strategic behavior in debt issuance (G32) |
| increasing competition in safe assets (G19) | increase in aggregate supply of safe assets (E51) |
| increasing competition in safe assets (G19) | impact on US's borrowing costs (F65) |
| increasing competition in safe assets (G19) | impact on US's welfare (I39) |