Reserve Asset Competition and the Global Fiscal Cycle

Governments tend to increase their borrowing at the same time, giving rise to a global fiscal cycle. This global fiscal cycle has a large component that is unexplained by global business cycle variables. We propose a novel explanation for the emergence of the global fiscal cycle: governments' competition over the provision of reserve assets gives rise to strategic complementarity in the issuances, even when the reserve assets are substitutes in partial equilibrium. We show our reserve-asset-competition channel explains economically significant common variation in fiscal variables, beyond the common variation induced by correlated business cycles. In doing so, our model of reserve asset demand and supply also shines light on the sources of variation in the convenience yields and seigniorage revenues earned on government debt.