The Macroeconomic Implications of US Market Power in Safe Assets / Jason Choi, Rishabh Kirpalani, Diego J. Perez.

Format:

Book

Author/Creator:

Choi, Jason.

Contributor:

National Bureau of Economic Research.

Kirpalani, Rishabh.

Perez, Diego J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30720.

NBER working paper series no. w30720

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

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.

Notes:

Print version record

December 2022.