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

22 Pages Posted: 17 Nov 2001  

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Philippe Weil

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)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2001

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 Classification: D51, D52, D60, E44, H60

Suggested Citation

Blanchard, Olivier J. and Weil, Philippe, Dynamic Efficiency, the Riskless Rate and Debt Ponzi Games Under Uncertainty (November 2001). MIT Department of Economics Working Paper No. 01-41. Available at SSRN: https://ssrn.com/abstract=290840 or http://dx.doi.org/10.2139/ssrn.290840

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Peter G. Peterson Institute for International Economics ( email )

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Washington, DC 20036
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Philippe Weil

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

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Brussels, B-1050
Belgium
+32 2 650 4220 (Phone)
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Centre for Economic Policy Research (CEPR)

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London, EC1V 3PZ
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National Bureau of Economic Research (NBER)

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United States

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