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Exorbitant privilege and fiscal autonomy

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  • Paola Subacchi
  • Paul van den
Abstract
An aspect of the ‘exorbitant privilege’ we examine in this paper is the ability of the reserve currency issuer to run expansionary fiscal policies to stabilize the economy when a negative shock occurs without triggering an adverse reaction of foreign lenders, including, in particular, higher interest rates imposed by global capital markets. To explore this ‘privilege’ we look at the G7, a group of advanced economies that enjoy larger fiscal space than other countries. We estimate a panel regression model to explain the differences in magnitude of fiscal policy responses to common shocks as a function of countries’ reserve currency status. We find that, indeed, the prevalence of this channel is not rejected by the data and that in fact it seems to have become stronger over time, supported by the global build-up of currency reserves.

Suggested Citation

  • Paola Subacchi & Paul van den, 2023. "Exorbitant privilege and fiscal autonomy," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 39(2), pages 283-299.
    • Handle: RePEc:oup:oxford:v:39:y:2023:i:2:p:283-299.
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    File URL: http://hdl.handle.net/10.1093/oxrep/grad008
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    References listed on IDEAS

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    1. Bi, Huixin, 2012. "Sovereign default risk premia, fiscal limits, and fiscal policy," European Economic Review, Elsevier, vol. 56(3), pages 389-410.
    2. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," Economic Journal, Royal Economic Society, vol. 0, pages 4-30, February.
    3. Ardagna Silvia & Caselli Francesco & Lane Timothy, 2007. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-35, August.
    4. Salvador Barrios & Per Iversen & Magdalena Lewandowska & Ralph Setzer, 2009. "Determinants of intra-euro area government bond spreads during the financial crisis," European Economy - Economic Papers 2008 - 2015 388, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
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    1. Paola Subacchi & David Vines, 2023. "Fifty years on: what the Bretton Woods System can teach us about global macroeconomic policy-making," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 39(2), pages 164-182.

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