A Note on Public Debt, Tax-Exempt Bonds, and Ponzi Games
20 Pages Posted: 23 Aug 2007
Date Written: July 2007
Abstract
By issuing tax-exempt bonds, the government can incur debt and never pay back any principal or interest, even if the economy without public debt evolves on a dynamically efficient growth path. The welfare effects of such a Ponzi type borrowing scheme are mixed. The current young will unambiguously benefit. Depending on preferences and the aggregate technology, also a finite number of subsequent generations may benefit. The welfare of all generations thereafter, however, will be lower than in the economy without public debt.
Keywords: Working Paper, Public debt, Bonds, Capital, Taxation
Suggested Citation: Suggested Citation
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