Exorbitant Privilege and the Sustainability of US Public Debt

Abstract

We study the extent to which the perceived cost of losing the exorbitant privilege the United States holds in global safe asset markets sustains its public debt safety. Our findings indicate that losing this special status in the event of a default significantly augments the debt capacity for the United States. Debt levels would be up to 30 percent lower if the United States did not have this special status. Most of this extra debt capacity arises from the loss of convenience yields on Treasuries, which makes debt more expensive following its loss, providing strong incentives to repay debt.