Dynamic Efficiency, the Riskless Rate and Debt Ponzi Games Under Uncertainty

Abstract:     
In a dynamically efficienct economy, can a government roll its debt forever and avoid the need to raise taxes? In a series of examples of production economies with zero growth, this paper shows that such Ponzi games may be infeasible even when the average rate of return on bonds is negative, and may be feasible even when the average rate of return on bonds is positive. The paper then reveals the structure which underlies these examples.

Keywords: Dynamic efficiency, pareto optimality, bubbles, Ponzi games, public debt, riskless rate.

JEL Classifications: D51, D52, D60, E44, H60

Working Paper Series