Research on the Macroeconomic Effects of Government Bonds

Author: Guo Hongyu
Publisher:
Publish Date: 2005-03-01
Features: The expansion of the financial functions of government bonds has broadened the scope of government bond policies. The seigniorage function of government bonds and their special role in maintaining market liquidity make government bond policies highly independent. Establishing a developed and comprehensive government bond market is a necessary condition for fully leveraging the macro-control functions of government bond policies. This book's research on the macroeconomic effects of government bonds generally follows the analytical framework of the Ricardian equivalence theorem, expanding from the perspectives of aggregate equilibrium and growth factors under the assumption of non-neutrality of debt.
First, under conditions of insufficient effective demand and non-full employment, the study examines the expansionary effect of government borrowing on aggregate demand. The expansionary effect of government bonds on aggregate demand primarily stems from the stimulative impact of government bond assets on consumption demand, the expansionary effect of increased government spending on consumption and investment demand, and the influence of tax-cutting government bonds on consumption and investment demand by increasing disposable personal income. However, even under non-full employment conditions, the impact of government bonds on aggregate demand is not necessarily expansionary. If government bond issuance leads to rising interest rates, it may suppress aggregate demand. Therefore, whether government bond issuance is expansionary depends critically on coordination with monetary policy, i.e., the degree of monetization of government bonds. If the scale of government bonds expands alongside an increase in money supply, aggregate demand will also expand, but this carries the risk of inflation.