Neutrality of government bonds reconsidered

This paper examines the thesis of neutrality of government bonds in the framework of a monetary growth model with an infinitely lived representative consumer. It is shown that, unlike the case of a non-monetary economy, the additional interest on an increased national debt can be offset partly by the ‘inflation tax’ rather then by ordinary taxes. If the former option is adopted by the government, then its bonds will no longer be neutral. Various forms of non-neutrality are derived and interpreted.