Journal of Applied Finance & Banking

Does External Debt Increase Net Private Wealth? The Relative Impact of Domestic versus External Debt on the US Demand for Money

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• Abstract

  The paper investigates the effects of domestic vs. external debt on money demand using US data from 1966Q1 to 2011Q1 period. The cointegration analysis reveals that there is no long-term equilibrium between external debt and money demand, suggesting the US government fails to effectively convert the proceeds from public debt into increased perceived private wealth. On the other hand, the existence of a long run positive correction between domestic debt and money demand implies that domestic bondholders view interest income as extra wealth, without fully discount future tax liabilities.