Exorbitant Privilege Gained and Lost: Fiscal Implications

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.