Research on the Macroeconomic Effects of Government Bonds

Author: Guo Hongyu
Publisher:
Publish Date: 2005-03-19
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 conducts research on the macroeconomic effects of government bonds primarily following the analytical framework of the Ricardian equivalence theorem, under the premise of debt non-neutrality, and explores it from two perspectives: overall equilibrium and growth factors.
First, under conditions of insufficient effective demand and unemployment, the study examines the expansionary effect of government borrowing on aggregate demand. The expansionary effect of government bonds on aggregate demand mainly stems from the stimulating effect of government bond assets on consumer demand, the expansionary effect of increased government spending on consumer and investment demand, and the impact of tax-reducing government bonds on increasing disposable personal income, thereby affecting consumer and investment demand. However, even under unemployment conditions, the effect 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 has an expansionary effect 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 may bring about inflationary risks.