Bond Indebtedness in a Recursive Dynamic CGE Model
CIRPEE Working Paper No. 07-10
98 Pages Posted: 8 May 2007 Last revised: 16 Jul 2018
Date Written: May 1, 2007
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 different 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
JEL Classification: C68, D58, G1, H63
Suggested Citation: Suggested Citation