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