Governments as borrowers and regulators

The ability to borrow is important for government survival. Governments routinely resort to policies that privilege their own debt on financial markets, exploiting their dual role as borrowers and regulators. We label such policies as borrowing privileges. These borrowing privileges nudge investors to hold the government’s own debt. They share similarities with prudential regulation, but skew the market in favor of the government’s debt; and they share similarities with financial repression, but are less severe and thus consistent with the growth of financial markets. Introducing the first systematic dataset documenting the use of such policies across countries and over time, we demonstrate that governments implement borrowing privileges when their interactions with the global economy heighten fiscal needs: when borrowing costs indicate tightened access to credit, when trade liberalization undercuts revenue, and where fixed exchange rates increase the value of fiscal space. Despite the mobility of financial assets and constraints from global markets, governments retain latitude in regulating domestic markets to their own fiscal benefit.