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Rational Ponzi Games

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Author Info
O'Connell, Stephen A
Zeldes, Stephen P

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Abstract

When can a government run a rational Ponzi game, i.e., issue debt and never pay back any interest or principal? The transversalit y condition of each individual implies that such schemes require an i nfinity of lenders. Given this, horizons are unimportant: Ponzi games cannot be ruled out by assuming that agents have infinite horizons. The authors point out both the basic similarity of, and some key diff erences between, rational Ponzi games and asset price bubbles or fiat money. Regarding international debt, the analysis implies that what matters for the feasibility of rational Ponzi games are conditions in the lenders', not the borrowers', economy. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Publisher Info
Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 29 (1988)
Issue (Month): 3 (August)
Pages: 431-50
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Handle: RePEc:ier:iecrev:v:29:y:1988:i:3:p:431-50

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  1. António Afonso, 2000. "Fiscal policy sustainability: some unpleasant European evidence," Working Papers 2000/12, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
  2. Qin Xiao & Randolph Gee Kwang Tan, 2006. "Signal Extraction with Kalman Filter: A Study of the Hong Kong Property Price Bubbles," Economic Growth centre Working Paper Series 0601, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre. [Downloadable!]
  3. Noriyuki Yanagawa & Gene M. Grossman, 1992. "Asset Bubbles and Endogenous Growth," NBER Working Papers 4004, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Cuddington, John T., 1997. "Analyzing the sustainability of fiscal deficitsin developing countries," Policy Research Working Paper Series 1784, The World Bank. [Downloadable!]
  5. Herschel I. Grossman, 1992. "Monetary Economics: A Review Essay," NBER Working Papers 3686, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Laurence Ball & Douglas W. Elmendorf & N. Gregory Mankiw, 1995. "The Deficit Gamble," NBER Working Papers 5015, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. John T. Cuddington, 1997. "Analysing the Sustainability of Fiscal Deficits in Developing Countries," International Finance 9706001, EconWPA. [Downloadable!]
  8. Chadha, J.S. & Nolan, C., 2003. "On the Interaction of Monetary and Fiscal Policy," Cambridge Working Papers in Economics 0303, Faculty of Economics, University of Cambridge. [Downloadable!]
  9. Jagjit S. Chadha & Charles Nolan, 2004. " Interest Rate Bounds and Fiscal Policy," CDMA Working Paper Series 0401, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
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  10. Eduardo Giménez, 2007. "On the positive fundamental value of money with short-sale constraints," Annals of Finance, Springer, vol. 3(4), pages 455-469, October. [Downloadable!] (restricted)
  11. William L. Helkie & David H. Howard, 1991. "External adjustment in selected developing countries in the 1990s," International Finance Discussion Papers 417, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  12. Berthold U. Wigger, 2007. "A Note on Public Debt, Tax-Exempt Bonds, and Ponzi Games," IMF Working Papers 07/162, International Monetary Fund. [Downloadable!]
  13. Alberto Bagnai, 2004. "Keynesian And Neoclassical Fiscal Sustainability Indicators, With Applications To Emu Member Countries," Public Economics 0411005, EconWPA. [Downloadable!]
  14. Stephen A. O'Connell & Stephen P. Zeldes, 1994. "Dynamic Efficiency in the Gifts Economy," NBER Working Papers 4318, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. repec:chb:bcchwp:05 is not listed on IDEAS
  16. Stefan Josten, 2006. "Dynamic fiscal policies and unemployment in a simple endogenous growth model," International Tax and Public Finance, Springer, vol. 13(6), pages 701-716, November. [Downloadable!] (restricted)
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