The historical behavior of interest rates and growth rates in U.S. data suggests that the government can, with a high probability, run temporary budget deficits and then roll over the resulting government debt forever. The purpose of this paper is to document this finding and to examine its implications. Using a standard overlapping-generations model of capital accumulation, the authors show that whenever a perpetual rollover of debt succeeds, policy can make every generation better off. This conclusion does not imply that deficits are good policy, for an attempt to roll over debt forever might fail. But the adverse effects of deficits, rather than being inevitable, occur with only a small probability.
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Volume (Year): 30 (1998) Issue (Month): 4 (November) Pages: 699-720 Download reference. The following formats are available: HTML
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Paper
Laurence Ball & Douglas W. Elmendorf & N. Gregory Mankiw, 1995.
"The Deficit Gamble,"
NBER Working Papers
5015, National Bureau of Economic Research, Inc.
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
O'Connell, Stephen A & Zeldes, Stephen P, 1988.
"Rational Ponzi Games,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 431-50, August.
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repec:bep:mactop:v:4:y:2004:i:1:p:1207-1207 is not listed on IDEAS
Laurence Ball & N. Gregory Mankiw, 1996.
"What Do Budget Deficits Do?,"
NBER Working Papers
5263, National Bureau of Economic Research, Inc.
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