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Rational Ponzi Games

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

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Abstract

When can a government borrow a dollar and never pay back any interest or principal? We call such an arrangement under perfect foresight a rational Ponzi game. We use the transversality condition facing individual agents to show that rational Ponzi games require an infinity of lenders. The horizon of individual agents is unimportant; Ponzi games cannot be ruled out by assuming that agents have infinite horizons. We point out both the basic similarity and some key differences between rational Ponzi games and asset price bubbles or fiat money. With reference to the international debt issue, the analysis implies that conditions in the borrower’s economy are irrelevant to the feasibility of rational Ponzi games; what matters is the relationship between the paths of interest rates and population and productivity growth rates in the lenders’ economy.

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Publisher Info
Paper provided by Wharton School Rodney L. White Center for Financial Research in its series Rodney L. White Center for Financial Research Working Papers with number 18-86.

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Handle: RePEc:fth:pennfi:18-86

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  1. Cuddington, John T., 1997. "Analyzing the sustainability of fiscal deficitsin developing countries," Policy Research Working Paper Series 1784, The World Bank. [Downloadable!]
  2. 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!]
  3. Alberto Bagnai, 2004. "Keynesian And Neoclassical Fiscal Sustainability Indicators, With Applications To Emu Member Countries," Public Economics 0411005, EconWPA. [Downloadable!]
  4. 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!]
  5. Berthold U. Wigger, 2007. "A Note on Public Debt, Tax-Exempt Bonds, and Ponzi Games," IMF Working Papers 07/162, International Monetary Fund. [Downloadable!]
  6. repec:chb:bcchwp:05 is not listed on IDEAS
  7. 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!]
  8. 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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  9. 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)
  10. 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)
    Other versions:
  11. 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!]
  12. 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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  13. Herschel I. Grossman, 1992. "Monetary Economics: A Review Essay," NBER Working Papers 3686, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  14. John T. Cuddington, 1997. "Analysing the Sustainability of Fiscal Deficits in Developing Countries," International Finance 9706001, EconWPA. [Downloadable!]
  15. Jagjit S. Chadha & Charles Nolan, 2004. " Interest Rate Bounds and Fiscal Policy," CDMA Working Paper Series 0401, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
    Other versions:
  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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