Bond Indebtedness in a Recursive Dynamic CGE Model

André Lemelin

Cahiers de recherche from CIRPEE

Abstract: In this paper, we present a minimalist version of a model of bond financing and debt, imbedded in a stepwise dynamic CGE model. The proposed specification takes into account the main characteristics of bond financing. Bonds compete on the securities market with shares, so that the yield demanded by the buyers of new bond issues increases as the cumulative bond debt grows relative to the stock of outstanding shares. Restrictions are imposed on the maturity structure of bonds, so that it is possible to attain a reasonable compromise between a realistic representation of the evolution of the debt, and the demands on model memory of past variables values which impinge on the current period. In the proposed model, the borrowing government reimburses bonds that have reached maturity, and pays interest on the outstanding debt. The prices of bonds issued at diffferent periods and with different maturities are consistent with an arbitrage equilibrium. The supply of new bonds and of new shares is determined by the government's and business's borrowing needs. Security demand reflects the rational choices of portfolio managing households, following a version of the Decaluwé-Souissi model. These notions are illustrated with fictitious data in model EXTER-Debt. The full specification of the model is described, and simulation results are presented which demonstrate model properties.

Keywords: CGE models; recursive dynamics; bond debt; financial assets (search for similar items in EconPapers)
JEL-codes: C68 D58 G1 H63 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cmp and nep-fmk
References: View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0710

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