The Macroeconomic Implications of Us Market Power in Safe Assets

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 and analyze the equilibrium in which the US government is the monopoly provider of this safe asset and contrast this with the case in which it acts a price taker. We use variation in estimated demand elasticities for US debt during highand low-volatility regimes to empirically distinguish between these two models and find that the data rejects 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 under-provision of safe assets, a sizable markup in the convenience yield, and large welfare benefits for the US in detriment of the rest of the world. We also study the implications of increasing competition in safe assets from other sovereigns and private institutions. ∗We thankMarcoDuarte, Zhengyang Jiang, RohanKekre, ArvindKrishnamurthy, RicardoLagos,Matteo Maggiori, Lorenzo Magnolfi, Dmitry Mukhin, Simon Gilchrist, Venky Venkateswaran as well as numerous seminar and conference participants for helpful comments and suggestions. We also thank Duong Dang for superb research assistance.