Consequences of Debt Policy in a Stochastically Growing Monetary Economy
The effects of open-market operations and long- versus short-bond financing on risk in financial markets in a stochastically growing economy are studied. An increase in short bonds, resulting from exchanging long bonds, increases the riskiness of long bonds and raises their real rate of return. An open-market purchase of either long or short bonds raises the price of long bonds and lowers their risk and real return. However, debt policy adjustments that affect the real return to long bonds do not affect real investment or growth, so that overall the welfare consequences of debt policy are neutral. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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Volume (Year): 39 (1998)
Issue (Month): 2 (May)
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