Ponzi Finance, Government Solvency and the Redundancy or Usefulness of Public Debt
AbstractWe study how the government's ability to borrow depends on its capacity to tax. Using a two-period OLG growth model, we establish the following. When lump-sum taxes are unrestricted, Ponzi finance is possible, regardless of whether the economy is dynamically inefficient and regardless of the relationship between the interest rate and the growth rate. Ponzi finance, and government debt generally, is unessential or redundant: it does not enlarge the set of allocations that can be supported as competitive equilibria. When lump-sum taxes are restricted, Ponzi finance (public debt) may be essential. Central to the paper is our characterization of feasible government fiscal-financial plans for an infinite-lived government facing a sequence of finite-lived overlapping private generations. The central idea is that the government does not bankrupt private agents. We contrast our criterion with the conventional government solvency constraint. The conventional solvency constraint (the present value of future government debt is non-positive in the infinitely distant future) is neither necessary nor sufficient for our feasibility criterion. When the government must use distortionary taxes and the long-run interest rate exceeds the long-run growth rate, our feasibility criterion implies the conventional solvency constraint.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1070.
Length: 48 pages
Date of creation: Apr 1994
Date of revision:
Contact details of provider:
Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.econ.yale.edu/
More information through EDIRC
Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
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.:
- Willem H. Buiter & Urjit R. Patel, 1992.
"Debt, Deficits and Inflation: An Application to the Public Finances of India,"
NBER Working Papers
3287, National Bureau of Economic Research, Inc.
- Buiter, Willem H. & Patel, Urjit R., 1992. "Debt, deficits, and inflation: An application to the public finances of India," Journal of Public Economics, Elsevier, vol. 47(2), pages 171-205, March.
- Buiter, Willem H & Patel, U, 1990. "Debt, Deficits and Inflation: An Application to the Public Finance of India," CEPR Discussion Papers 408, C.E.P.R. Discussion Papers.
- Calvo, Guillermo A & Obstfeld, Maurice, 1988. "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes," Econometrica, Econometric Society, vol. 56(2), pages 411-32, March.
- Feldstein, Martin, 1988.
"The Effects of Fiscal Policies when Incomes Are Uncertain: A Contradiction to Ricardian Equivalence,"
American Economic Review,
American Economic Association, vol. 78(1), pages 14-23, March.
- Martin Feldstein, 1988. "The Effects of Fiscal Policies When Incomes are Uncertain: A Contradiction to Ricardian Equivalence," NBER Working Papers 2062, National Bureau of Economic Research, Inc.
- Corsetti, G., 1990. "Testing For Solvency Of Public Sector: An Application To Italy," Papers 617, Yale - Economic Growth Center.
- Andrew B. Abel, .
"The Implications of Insurance for the Efficacy of Fiscal Policy,"
Rodney L. White Center for Financial Research Working Papers
6-88, Wharton School Rodney L. White Center for Financial Research.
- Andrew B. Abel, 1988. "The Implications of Insurance for the Efficacy of Fiscal Policy," NBER Working Papers 2517, National Bureau of Economic Research, Inc.
- Andrew B. Abel, . "The Implications of Insurance for the Efficacy of Fiscal Policy," Rodney L. White Center for Financial Research Working Papers 06-88, Wharton School Rodney L. White Center for Financial Research.
- Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1991.
"Generational Accounts - A Meaningful Alternative to Deficit Accounting,"
NBER Working Papers
3589, National Bureau of Economic Research, Inc.
- Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1991. "Generational Accounts: A Meaningful Alternative to Deficit Accounting," NBER Chapters, in: Tax Policy and the Economy, Volume 5, pages 55-110 National Bureau of Economic Research, Inc.
- Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1991. "Generational accounts: a meaningful alternative to deficit accounting," Working Paper 9103, Federal Reserve Bank of Cleveland.
- Enders, Walter & Lapan, Harvey E., 1982.
"Social Security Taxation and Inter-Generational Risk Sharing,"
Staff General Research Papers
10822, Iowa State University, Department of Economics.
- Enders, Walter & Lapan, Harvey E, 1982. "Social Security Taxation and Intergenerational Risk Sharing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(3), pages 647-58, October.
- Buiter, Willem H, 1997.
"Generational Accounts, Aggregate Saving and Intergenerational Distribution,"
London School of Economics and Political Science, vol. 64(256), pages 605-26, November.
- Willem H. Buiter, 1996. "Generational Accounts, Aggregate Savings, and Intergenerational Distribution," IMF Working Papers 96/76, International Monetary Fund.
- Willem H. Buiter, 1995. "Generational Accounts, Aggregate Saving and Intergenerational Distribution," NBER Working Papers 5087, National Bureau of Economic Research, Inc.
- Ioan Talpos & Cosmin Enache, 2008. "Fiscal Policy Sustainability In Romania," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(10), pages 23.
- Uhlig, H.F.H.V.S., 1997. "Capital Income Taxation and the Sustainability of Permanent Primary Deficits," Discussion Paper 1997-11, Tilburg University, Center for Economic Research.
- Polackova, Hana, 1997. "Population aging and financing of government liabilities in New Zealand," Policy Research Working Paper Series 1703, The World Bank.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Glena Ames).
If references are entirely missing, you can add them using this form.