Abstract
The ability to borrow on financial markets at low rates is an important source of government survival. We identify a set of policies that governments use to create an advantaged position for their own debt on financial markets, exploiting their dual role as borrowers and regulators. These borrowing privileges require or incentivize banks and institutional investors to hold a share of their assets in government debt. We show that governments implement borrowing privileges to shore up demand for their own debt when fiscal pressures increase: when borrowing costs are high, when alternative revenue sources are unavailable, and when monetary policy constraints increase the value of fiscal space. Despite the often emphasized mobility of financial assets, governments retain latitude in regulating domestic financial markets, because financial services providers are tied to predominantly immobile customers. As financial services become more important in domestic economies, governments can increasingly use financial regulation for their own fiscal benefit.