This paper aims to explore the consequences of government deficit on the
financial market. In an incomplete market, the increased government bond,
which is generally accepted as a risk-free asset, tends to enhance the hedging
capacity of consumers and may induce them to take a greater position of the
private risky asset. The paper, based on a stochastic general equilibrium
model with two overlapping generations, delivers theoretical discussions on
this issue. It identifies a threshold, below(above) which increase in the
government debt is likely to enlarge(shrink) the market for private capital.