Abstract

Government Equity-Bonds and Stabilization: A Proposal

Current monetary policy is conducted by open market operations which swap money for bonds. This may be an ineffective means of controlling the ratio of market value of the capital stock to its replacement value or “q’” in James Tobin’s notation. A proposal is made to issue some of the government debt in a bond which is indexed to equity or the stock market. By conducting open market operations in this security, the government would be able to control equity prices rather precisely and, hence, control q. Evidence is summarized which illustrates the role of equity prices in the determination of national income and suggests that some mechanism is needed to control equity prices more precisely. The feasibility of the government equity-bond is discussed in some detail. It is concluded that the bond should be readily marketable, can be priced rather easily by investors and would provide efficient diversification for many investors. Stabilization policy with these bonds would generally involve open market operations in regular debt and equity-debt. The political dynamics of monetary policy following the introduction of this bond may differ considerably from the present