GOVERNMENT BONDS the relevant horizon for the future taxes(which might correspond to the remaining average lifetimes of the current taxpayers) will be shorter than that for the interest payments. 2 Accordingly, a stream of equal values for interest payments and taxes will have a net positive present value. This argument has been used explicitly by Thompson(1967, p. 1200). The ally based on imperfect tal markets, supposes that the relevant discount rate for tax liabilities will be higher than that for the interest payments. Hence, even with an infinite horizon for tax liabilities, a stream of equal values for interest payments and taxes will have a net positive present value. This argument has been used by Mundell(1971). 3 The first part of this paper deals with the effect of government bond issue on the calculus of individual wealth in an overlapping-generations economy with physical capital where individuals have finite lives. No elements of"capital market imperfections "are introduced into this model The key result here is that, so long as there is an operative intergenerational transfer(in the sense of an interior solution for the amount of bequest or ft across generations), there will be no net-wealth effect and, he effect on aggregate demand or on interest rates of a marginal change in government debt. This result does not hinge on current generations' weighing the consumption or utility of future generations in any sense on an equal basis with own consumption, nor does it depend on current generations' placing any direct weight at all on the consumption or utility f any future generation other than the immediate descendant. Current generations act effectively as though they were infinite-lived when they re connected to future generations by a chain of operative inter generational transfers The analysis then shows that social security payments are analogous to anges in government debt. Marginal changes in this type ( or other types)of imposed intergenerational transfers have no real effects when current and future generations are already connected by a chain of opera tive discretionary transfers, The effects of inheritance taxes and of transaction costs"for government bond issue and tax collections are also considered. It is shown that inheritance taxes do not affect the basic the net-wcalth effect of government bonds would actually be negaliathat results, but that the presence of government transaction costs implies The second part of the deals with the existence of imperfect private capital markets. It is shown that, to the extent that public debt This type of argument applies taxes or to taxes based on wage income, but not to taxes which are based on the of nonhuman assets. This distinction has been made by Mundell(1971, pp. 9, 10) a different line of argument that leads to a similar conclusion is that cts like a monopolist in the ion of the liquidity services yielded by its liabilities. I discuss this argument in part Ill, below