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Asset Substitutability and the Impact of Federal Deficits

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  • V. Vance Roley
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    Abstract

    In this paper, the role of asset substitutability in determining the impact of debt-financed federal deficits is examined. The issues are first discussed in the context of a simple analytical model in which financial assets are disaggregated into money, federal debt,and corporate bonds. In this model, it is shown that depending on the degree of substitutability among financial assets, a range of possible outcomes associated with a change in the federal deficit is possible.Next, the issue of asset substitutability is examine dempirically in a disaggregated structural model of the Treasury security,corporate bond, and equity markets. Using this model, the implications of larger debt-financed federal deficits are then examined in a series of simulation experiments.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1082.

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    Date of creation: Feb 1983
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    Publication status: published as Roley, V. Vance. "Asset Substitutability and the Impact of Federal Deficits ." The Economic Consequences of Government Deficits, edited by L. Meyer, Kluwer-Nijhoff Publishing Company, 1983.
    Handle: RePEc:nbr:nberwo:1082

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    1. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
    2. Laurence J. Kotlikoff & Lawrence H. Summers, 1980. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," NBER Working Papers 0445, National Bureau of Economic Research, Inc.
    3. Walsh, Carl E., 1983. "Asset prices, asset stocks and rational expectations," Journal of Monetary Economics, Elsevier, vol. 11(3), pages 337-349.
    4. Feldstein, Martin, 1982. "Government deficits and aggregate demand," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 1-20.
    5. Friedman, Milton, 1970. "A Theoretical Framework for Monetary Analysis," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 193-238, March-Apr.
    6. Silber, William L, 1970. "Fiscal Policy in IS-LM Analysis: A Correction," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(4), pages 461-72, November.
    7. Blanchard, Olivier J & Plantes, Mary Kay, 1977. "A Note on Gross Substitutability of Financial Assets," Econometrica, Econometric Society, vol. 45(3), pages 769-71, April.
    8. Hansen, Bent, 1973. "On the Effects of Fiscal and Monetary Policy: A Taxonomic Discussion," American Economic Review, American Economic Association, vol. 63(4), pages 546-71, September.
    9. Cohen, Darrel & McMenamin, J Stuart, 1978. "The Role of Fiscal Policy in a Financially Disaggregated Macroeconomic Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(3), pages 322-36, August.
    10. Kochin, Levis A, 1974. "Are Future Taxes Anticipated by Consumers? Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(3), pages 385-94, August.
    11. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
    12. Brunner, Karl & Meltzer, Allan H, 1972. "Money, Debt, and Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 80(5), pages 951-77, Sept.-Oct.
    13. Friedman, Benjamin Morton, 1977. "Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates," Scholarly Articles 4554309, Harvard University Department of Economics.
    14. James M. Brundy & Dale W. Jorgenson, 1971. "Efficient estimation of simultaneous equations by instrumental variables," Working Papers in Applied Economic Theory 3, Federal Reserve Bank of San Francisco.
    15. Infante, Ettore F. & Stein, Jerome L., 1976. "Does fiscal policy matter?," Journal of Monetary Economics, Elsevier, vol. 2(4), pages 473-500, November.
    16. Roley, V Vance, 1979. "A Theory of Federal Debt Management," American Economic Review, American Economic Association, vol. 69(5), pages 915-26, December.
    17. Pesando, James E, 1978. "On the Efficiency of the Bond Market: Some Canadian Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1057-76, December.
    18. Turnovsky, Stephen J, 1978. "Macroeconomic Dynamics and Growth in a Monetary Economy: A Synthesis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(1), pages 1-26, February.
    19. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
    20. Christopher A. Sims, 1982. "Policy Analysis with Econometric Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1), pages 107-164.
    21. Meyer, Laurence H., 1975. "The balance sheet identity, the government financing constraint, and the crowding-out effect," Journal of Monetary Economics, Elsevier, vol. 1(1), pages 65-78, January.
    22. Frederic S. Mishkin, 1978. "Efficient-Markets Theory: Implications for Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 707-752.
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    Cited by:
    1. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 173-224.

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