One of the most important innovations in bond financing and in mortgage lending has been the rapid adoption of variable-rate instruments in recent years. Notes and bonds bearing an interest rate between one and two percentage points above the prime rate are becoming common in corporate financing. Similarly, variable-rate mortgages (VRM's) with the interest rate tied to the deposit rate of S&L's or linked to the changing yields on competing investments have spread beyond Florida and California to many states. The Federal Home Loan Bank Board has recently endorsed the variable-rate concept and the Federal Home Loan Mortgage Corporation is preparing guidelines for secondary market operations in VRM's. Portfolio managers are thus taking note of the possibility of acquiring long-term instruments providing some of the resiliency of yields and a measure of real value protection characteristic of short-term issues.

Researchers and political analysts concerned with the inter-regional flow of mortgage funds have often pointed to the existence of yield differentials as prima facie evidence of misallocation of capital and national resources. Limited information and myopic lending horizons, with market imperfections reinforced by state laws and institutional segmentation, have been postulated. They are regarded as responsible for costly “frictions” in the export of capitalto the fast-growing, generally low-income, states, particularly those of the South. Both federal and state legislative action, intensified private arbitrage, and better secondary market facilities and instruments are then urged to improve inter-regional financial mediation to reduce or eliminate the yield differentials.

The U. S. economy is found to be sufficiently open to make the balance on foreign transactions an essential part of the equilibration process between saving and investment. Specifically, over the past two decades, changes in the national saving rate have increasingly been matched by changes in net foreign rather than domestic investment. Thus, it would be counterfactual to assume in policy discussions that measures to raise the national saving rate add fully to the stock of productive capital in the United States, barring only Keynesian complications. Conversely, a stimulus to domestic investment could be validated in part by drawing on foreign saving.

George M. von Furstenberg, The Effect of the Changing Size and Composition of Government Purchases on Potential Output: A Reply, The Review of Economics and Statistics, Vol. 64, No. 3 (Aug., 1982), pp. 527-528

and not from the explicit examination of substitutability between private and public provision of goods and services. If private and government investment expenditures are perfect substitutes (the limiting case) then increases in government investment goods purchases financed by additional debt creation reduces potential output because private net-of-deficit savings decline by more than the increase in government investment at the initial level of output. Since government debt is viewed as an addition to wealth there is a decline in the relative desire to accumulate capital goods, whether private or public. Thus, the observation that there may be a potential decrease in steady state output is not due to perfect (or any other degree of) substitutability between private and public expenditures but rather is due to a less than perfect symmetry to the wealth effects associated with tax and deficit financing. The introduction of less-thanperfect' expenditure substitutability mitigates against this revenue composition effect, as a one dollar increase in government investment goods would initially cause a less than one dollar decrease in private investment demand. In like fashion, von Furstenberg's assertion that the marginal propensity to save must be unity if fiscal actions are not to affect steady state output (p. 77) is correct only within the context of his particular private savings function. If future tax liabilities are perfectly discounted then the marginal propensity to save will be unity out of the obtained by the private sector from changes in the form of financing government expenditures. Thus, alluding to an observed savings rate of 8% in the United States does not constitute any substantive evidence about possible impacts on potential output of changes in government expenditures, as that average savings rate cannot be applied to marginal changes in disposable income when future tax liabilities are fully, or even partially, discounted.

George M. von Furstenberg, The Long-Term Effects of Government Deficits on the U.S. Output Potential, The Journal of Finance, Vol. 33, No. 3, Papers and Proceedings of the Thirty-Sixth Annual Meeting American Finance Association, New York City December 28-30, 1977 (Jun., 1978), pp. 989-1001