| Summary: | The focus of this paper is on the area between these two types of studies. The markets for municipal, corporate, and Treasury bonds are investigated through a financial model which embodies supply and demand functions for each market. Financial as well as certain real explanatory variables are brought into a system of simultaneous equations in order to test various hypotheses. In this way, we hope to come to a better understanding of the behavior of bond markets in the United States. The results are found to be consistent with municipal and Treasury bonds, and corporate and Treasury bonds, being relatively close substitutes for one another. Moreover, the demand for bonds does not appear to be influenced by returns available in the stock market. The supply of bonds in all three markets is found to be positively related to expected expenditures and to be interest inelastic. <BR> In this paper, a number of hypotheses about the corporate, municipal, and Treasury bond markets were tested empirically. Demand and supply functions for each market were incorporated into a simultaneous equations model. Using the two-stage least squares estimating technique on data for the 1953-1968 period, insight was gained into the interrelationship between bond markets. The estimated parameters were in general agreement with hypotheses regarding the functioning of the markets; demand for bonds is influenced positively by own interest rates and negatively by lagged holdings and interest rates on substitute bonds. Of considerable interest was the fact that the evidence was consistent with municipal and Treasury bonds, and corporate and Treasury bonds, being substitutes, but not consistent with corporate and municipal bonds being substitutes.
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