Global Hegemony and Exorbitant Privilege - Carolin Pflueger

Speaker:  Carolin Pflueger, University of Chicago

Location: online or at Kiel Institute for the World Economy, Chausseestraße 111, 10115 Berlin

Organizers: Kiel Institute for the World Economy, CEPR

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Abstract: We present a dynamic two-country model in which military spending, geopolitical dominance, and government bond prices are jointly determined. The model reflects three facts: hegemons enjoy a funding advantage, this advantage rises with geopolitical tensions, and war losers devalue their debts more. In the model, greater bond revenue enables military investment, in turn increasing the safety value of bonds to international investors. Debt capacity strengthens the hegemon’s military and financial advantage but introduces steady-state multiplicity and fragility. With intermediate capacity, initial conditions determine the hegemon. However, with high capacity, self-fulfilling bond market expectations can trigger hegemonic transitions and geopolitical fragility.