Abstract

Government securities issuers need buyers. Policymakers can do much to develop voluntary demand by financial institutions, nonfinancial institutions, and retail investors. Historically, governments have relied on their taxation and coercion powers to ensure adequate demand for their securities issues, resulting in captive sources of government funding. They did not always achieve their aim of lowering the cost of finance, but a certain outcome of this forced funding was economic inefficiency from misallocated resources. Although most developed countries have shifted from captive sources of government funding toward reliance on a diverse base of voluntary investors, captive sources of government funding are still a major feature of government finance in some developing countries. Governments can, through appropriate reform programs, licensing, regulation, and supervision, encourage the development of wholesale investor institutions that invest in government securities for income, hedging, trading, and repo transactions. Governments can also develop a retail investor base for government securities, and can further broaden and diversify the investor base by opening the market to foreign investors.