Asset Substitutability and the Impact of Federal Deficits

V. Vance Roley

No 1082, NBER Working Papers from National Bureau of Economic Research, Inc

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.

Date: 1983-02
Note: ME
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Published as Roley, V. Vance. "Asset Substitutability and the Impact of Federal Deficits ." The Economic Consequences of Government Deficits, edited by L. Meyer, Kluwer-Nijhoff Publishing Company, 1983.

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