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. |