ABSTRACT

We study how countries compete to become an international safe asset provider. Governments in our model issue debt to a common set of investors, resulting in competition as issuance by one country raises required yields for all countries. Governments are tempted ex post to engage in expropriation or capital controls, and can build reputation as a safe asset provider by resisting temptation to do so. We show how increased competition deters countries from building reputation, leaving more countries stuck at low reputation levels and unable to supply safe assets. We derive a model-implied measure of country reputation. We estimate this reputation measure using micro-data on investor portfolio holdings, and use it to track the evolution of countries’ reputation over time. We study how an incumbent safe asset provider, like the U.S., uses its issuance strategy to deter the emergence of competitors.

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