https://macropaperwarehouse.com/authors/rishabh-kirpalani/Rishabh KirpalaniHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/us-public-debt-and-safe-asset-market-power/https://macropaperwarehouse.com/papers/us-public-debt-and-safe-asset-market-power/<p>This paper asks whether the U.S. government exploits its market power as the dominant global supplier of safe assets when setting the quantity of public debt, and quantifies the macroeconomic consequences of this strategic behavior. The paper develops a two-country general equilibrium model in which U.S. public debt provides a non-pecuniary benefit to foreign holders (capturing liquidity, collateral, and safety value) and the U.S. is the monopoly provider of this asset — facing a downward-sloping demand curve for Treasuries, so that issuing more debt reduces the convenience yield. The paper then tests empirically whether the data favor this monopoly model over a price-taking benchmark, exploiting the industrial organization insight that rotations in the demand curve (changes in elasticities during high- versus low-volatility regimes) can distinguish strategic from competitive behavior. Using quarterly data from 1935 to 2020, the paper finds that the data reject price-taking behavior in favor of the monopoly model across a wide range of specifications. Quantitatively, the monopoly calibration implies that U.S. market power generates approximately 45% of the observed convenience yield as a markup (about 30 basis points out of 68 basis points on average), causes safe asset supply to be roughly half what it would be under price-taking, and generates welfare gains to the U.S. of 0.21% in permanent consumption equivalents — almost half of which is attributable to market power rather than to the non-pecuniary value itself.</p>