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The Perception of Government Bonds and Money as Net Wealth: An Integrated Approach

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Author Info

  • Alpha C. Chiang

    (University of Connecticut)

  • Stephen M. Miller

    (University of Connecticut)

Abstract

Although much work examines whether government bonds constitute net wealth, little attention focuses on whether government money does. Most analysts merely assert that government money is net wealth. In an inflationary environment, however, money experiences "expected-inflation discounting" just as bonds experience "tax discounting." Indeed, Chiang and Miller (1988) find empirical evidence suggesting that the private sector discounts money more heavily than bonds. This paper provides the theoretical underpinnings for the two types of discounting in an integrated approach, where both new money and new bonds can finance the interest on outstanding bonds. We first analyze the objective aspect of bond- and money-discounting assuming that the private sector fully recognizes the economic consequences of bond and money issue. We then offer some conjectures on the subjective aspect of discounting by focusing on reasonable assumptions about the awareness of individual agents. Both aspects lend theoretical support for the view that more discounting of money exists than discounting of bonds. Finally, stability analysis of balanced growth equilibria further buttresses our theoretical findings.

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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 1998-05.

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Length: 22 pages
Date of creation: Jan 1998
Date of revision:
Publication status: Published in Eastern Economic Journal, Fall 1998
Handle: RePEc:uct:uconnp:1998-05

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Web page: http://www.econ.uconn.edu/
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Keywords: tax discounting; expected inflation discounting; net wealth;

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References

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  1. Michael R. Darby, 1984. "Some pleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  2. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  3. Alpha C. Chiang & Stephen M. Miller, 1988. "Inflation Expectations, Wealth Perception, and Consumption Expenditure," Eastern Economic Journal, Eastern Economic Association, vol. 14(1), pages 27-38, Jan-Mar.
  4. Tanner, J Ernest, 1970. "Empirical Evidence on the Short-Run Real Balance Effect in Canada," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(4), pages 473-85, November.
  5. Buchanan, James M, 1976. "Barro on the Ricardian Equivalence Theorem," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 337-42, April.
  6. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  7. Preston J. Miller & Thomas J. Sargent, 1984. "A reply to Darby," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  8. Thomas M. Supel & Richard M. Todd, 1984. "Should currency be priced like cars?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  9. 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.
  10. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  11. Seater, John J. & Mariano, Roberto S., 1985. "New tests of the life cycle and tax discounting hypotheses," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 195-215, March.
  12. Feldstein, Martin S, 1976. "Perceived Wealth in Bonds and Social Security: A Comment," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 331-36, April.
  13. Seater, John J, 1982. "Are Future Taxes Discounted?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(3), pages 376-89, August.
  14. Kormendi, Roger C, 1983. "Government Debt, Government Spending, and Private Sector Behavior," American Economic Review, American Economic Association, vol. 73(5), pages 994-1010, December.
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