TAILIEUCHUNG - Are Government Bonds Net Wealth?

In cross-economy comparisons (such as the graphs on pages 43 and 95 of this volume), it is notable that both banking and bond markets tend to be larger, relative to GDP, in rich countries,2 although even some rich countries still have small bond markets. As economies mature, banking markets tend to become developed before bond markets. Yoshitomi and Shirai (2001) and Shirai (2001) suggest several reasons for this: in poor countries, individuals have a greater preference for liquid short-term bank deposits; institutional investors are underdeveloped or non-existent; few companies are sufficiently large and reputable to issue bonds; and the requisite informational, legal and judicial infrastructure is not. | Are Government Bonds Net Wealth Robert J. Barro University of Chicago The assumption that government bonds are perceived as net wealth by the private sector is crucial in demonstrating real effects of shifts in the stock of public debt. In particular the standard effects of expansionary fiscal policy on aggregate demand hinge on this assumption. Government bonds will be perceived as net wealth only if their value exceeds the capitalized value of the implied stream of future tax liabilities. This paper considers the effects on bond values and tax capitalization of finite lives imperfect private capital markets a government monopoly in the production of bond liquidity services and uncertainty about future tax obligations. It is shown within the context of an overlappinggenerations model that finite lives will not be relevant to the capitalization of future tax liabilities so long as current generations are connected to future generations by a chain of operative intergenerational transfers either in the direction from old to young or in the direction from young to old . Applications of this result to social security and to other types of imposed intergenerational transfer schemes are also noted. In the presence of imperfect private capital markets government debt issue will increase net wealth if the government is more efficient at the margin than the private market in carrying out the loan process. Similarly if the government has monopoly power in the production of bond liquidity services then public debt issue will raise net wealth. Finally the existence of uncertainty with respect to individual future tax liabilities implies that public debt issue may increase the overall risk contained in household balance sheets and thereby effectively reduce household wealth. The assumption that government bonds are perceived as net wealth by the private sector plays an important role in theoretical analyses of monetary and fiscal effects. This assumption appears explicitly or .

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