Bond Financing and Debt in a Stepwise Dynamic CGE Model (La Dette Obligataire Dans Un Megc Dynamique Sequentiel)

In this paper, we present a minimalist version of a model of bond financing and debt, to be imbedded in a stepwise dynamic CGE model. The proposed specification takes into account the following characteristics of bond financing:- bonds are issued at a given date;- they have a given face value;- they bear interest at a rate that is fixed relative to their face value;- they have a fixed maturity date, at which they are reimbursed by the issuer to the holders.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 entreprises' borrowing needs. Security demand reflects the rational choices of portfolio managing households, as in the Decaluwe-Souissi model.The model is presented in two versions: a basic model, and a model in which, although there is still no money, the real face value of bonds is eroded as it would due to inflation