The Perception of Government Bonds and Money as Net Wealth: An Integrated Approach

Although much work examines whether government bonds constitute net wealth, little attention focuses on whether government money does. Most analysts merely assert that government money is net wealth. In an inflationary environment, however, money experiences "expected-inflation discounting" just as bonds experience "tax discounting." Indeed, Chiang and Miller (1988) find empirical evidence suggesting that the private sector discounts money more heavily than bonds. This paper provides the theoretical underpinnings for the two types of discounting in an integrated approach, where both new money and new bonds can finance the interest on outstanding bonds. We first analyze the objective aspect of bond- and money-discounting assuming that the private sector fully recognizes the economic consequences of bond and money issue. We then offer some conjectures on the subjective aspect of discounting by focusing on reasonable assumptions about the awareness of individual agents. Both aspects lend theoretical support for the view that more discounting of money exists than discounting of bonds. Finally, stability analysis of balanced growth equilibria further buttresses our theoretical findings.