The effects of national debt on real economic activity has been a recurring topic in the literature on macroeconomic policy analysis since the time of Adam Smith. The problem is usually stated as follows: for a given level of government spending, is the economy sensitive to the financing mix between tax and debt? Historically, attention has focused on the question of whether or not individuals perceive government bonds as net wealth, the link between wealth and real activity being taken as given. The main point of debate is well established. The issue of bonds raises private assets by the full value of the bonds. The corresponding tax liabilities for interest payments and retirement of the debt extend indefinitely into the future. The perception of bonds as net wealth would then appear to depend on the length of the individual's optimization horizon. The most recent contribution to this debate was made by Robert Barro (1974) in which he argued that, despite the limitation of finite lives, bonds will not be regarded as net wealth in a system characterized by operative intergenerational transfers. The essence of his argument is that inclusion of a bequest motive effectively converts a finite horizon into an infinite one. In that paper, Barro acknowledged a potential limitation on his proof of the neutrality result; it was only valid for bonds that are redeemed at a known point in the future. This limitation was raised again in a subsequent exchange with Martin Feldstein in which Barro (1976) agreed that for a growing economy, an increase in steady-state per capita debt will generate net wealth if the rate of growth is greater than the interest rate.' However, he argued that such a steadystate growth situation would not be consistent with rational utility-maximizing behavior. The main theme of this paper is that the literature has focused attention on the wrong question. The real effects of national debt are independent of whether or not individuals perceive the debt as net wealth. The correct question is whether or not changes in the level of debt force individuals into patterns of intertemporal consumption that they are unable to neutralize by adjustments in their portfolio behavior. Viewing neutrality in this light leads to some reinterpretation of the conditions under which neutrality is likely to hold. My analysis starts where Barro and Feldstein leave off. Within the framework of the overlapping-generations model with gift and bequest motives, I show that steady-state equilibrium growth is consistent with a growth rate in excess of the interest rate indeed, without specific knowledge of the parameters of the economy, there are no a priori grounds on which to expect any particular relationship between the growth and interest rates. More importantly, so long as it is valid to view the aggregate economy as behaving like a composite individual, changes in the steady-state level of government debt are neutral regardless of which relationship prevails, provided one or the other of the intergenerational transfer motives is operative. I will refer to this as the extended neutrality theorem. Section I presents an analysis of steadystate growth with gift and bequest behavior. The steady-state growth path is shown to lie above the Golden Rule solution if the gift

This paper addresses the question of how government mission‐oriented R & D spending affects private R & D spending and thereby the total investment in technology. The problem is approached within the context of the capital asset pricing model in which the firm views investment projects in terms of their risk and return characteristics. The firm is assumed to produce jointly an established product and an R & D‐intensive product, where the latter generates an additional output of technology, or spillover, that is used as an input into the former. By investing in R & D the firm alters its risk and return characteristics in two ways: through the expected profits from the sale of the R & D‐intensive good; and through the expected profits from the spillover. In this model, government mission‐oriented R & D contracting affects the firm by enabling it to separate to some extent these two sources of risk and return. The main implication of the analysis is that while some public crowding out of private R & D is likely, this is almost certain to be incomplete. The empirical evidence from the U.S. transport industry supports the model and suggests that each dollar of government funding adds around 92 cents to total R & D spending; crowding out private investment by as little as eight percent.

Irving Fisher's Theory of Interest has proved to be a most durable and influential contribution to economic theory. A central element of Fisher's contribution is the Fisher hypothesis that, over the longer term, the real rate of interest is approximately constant, being determined largely by time preference, with movements in the nominal interest rate reflecting movements in the rate of inflation one-for-one. The paradox of the Fisher hypothesis is that, despite its wide acceptance as the cornerstone of interest rate theory, most empirical evidence appears to be inconsistent with the hypothesis, at least in its strictest form. This empirical anomaly was noted by Fisher himself, who attributed it to money illusion. In the fifty years following the publication of the Theory of Interest, a considerable literature has evolved around this paradox.' The unifying theme of this literature is a common acceptance of the essence of Fisher's hypothesis. Most of the energy in this literature has been devoted to explaining systematic movements in the real rate of interest, and to providing reasons why the relationship between the nominal interest rate and inflation may only be approximate in