Dynamic Efficiency, the Riskless Rate and Debt Ponzi Games Under Uncertainty
Olivier J. Blanchard
National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics
Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
MIT Department of Economics Working Paper No. 01-41
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.
Number of Pages in PDF File: 22
Keywords: Dynamic efficiency, pareto optimality, bubbles, Ponzi games, public debt, riskless rate.
JEL Classification: D51, D52, D60, E44, H60
Date posted: November 17, 2001