Bonds, Interests and Capital Accumulation

A monetarist model in which the economic agents do not suffer from future-tax-liabilities illusion is drawn as a counter example to both pure quantity-theoretic and pure Fisherian analyses. Money, bond and productive-capital demand functions are all simultaneously derived, together with a theory of the price level and of the nominal rate of interest. According to it bonds crowd private investment out. Simulations of the Quantity Theory of Money, of the Fisher effect, of the Mundell-Tobin effect, as well as of a deficit-financed tax cut, are presented. Keynesian-like bond-matters implications are found. The underlying framework can also replicate the Barsky and Summers' 1988 analysis of the Gibson paradox under the golden standard period. Incidentally, the model does not exhibit the Mehra-Prescott puzzle