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On the Feasibility of Debt Ponzi Schemes - A Bond Portfolio Approach

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  • Martin Barbie
  • Marcus Hagedorn

Abstract

This paper provides a general approach in the framework of a complete markets stochastic overlapping generations model to assess whether debt Ponzi schemes are feasible and Pareto-improving. We derive conditions in terms of bond interest rates of different maturities which can be used to assess different roll over strategies. Furthermore, we clarify how a dynamic roll over strategy of debt interacts with considerations in providing insurance against aggregate shocks by intergenerational risk sharing. A main result of this paper is that the feasibility of roll over strategies is unrelated to intergenerational insurance considerations that have received much attention in the literature. In fact, under the empirically relevant scenario of countercyclical real interest rates a Pareto improving roll over strategy of debt typically implies an increased variability of old age consumption. We develop a detailed intuition for our results along a series of examples

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 541.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nawm04:541

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Keywords: Government Debt; Debt Ponzi Scheme; Term Structure of Interest Rates;

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