Working Paper: NBER ID: w1082
Authors: V. Vance Roley
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.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal deficits (H62) | Interest rates (E43) |
| Federal deficits (H62) | Private spending (H59) |
| Asset substitutability (G19) | Private spending (H59) |
| Federal deficits (H62) | Corporate bond rate (E43) |
| Wealth (D31) | Money demand (E41) |
| Asset substitutability (G19) | Interest rates (E43) |