Government Solvency, Ponzi Finance and the Redundancy and Usefulness of Public Debt
AbstractWe investigate how the ability of the government to depart from budget balance and issue debt expands the set of equilibria that can be supported using lump-sum tax-transfer instruments. We show how this depends on the restrictions that exist on the capacity to tax and make transfer payments, and what these restrictions imply for the government's ability to issue debt. Central to our analysis is the definition of solvency for an infinite-lived government in an infinite-lived economy with overlapping generations of finite-lived households. Our specification is derived from the demand for public debt by private agents and the non-negativity constraints on the capital stock and on private consumption by all generations. Under fairly tight restrictions on the government's tax-transfer menu, our solvency constraint implies the conventional solvency constraint. With unrestricted taxes and transfers Ponzi finance is always possible but 'inessential": it does not expand the set of equilibria that can be supported. Ponzi finance can be "essential" when taxes and transfers are restricted. The paper establishes a number of results that demonstrate how the government's ability to issue debt allows restricted tax-transfer schemes to support all equilibria attainable using unrestricted taxes and transfers
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Bibliographic InfoPaper provided by Yale - Economic Growth Center in its series Papers with number 659.
Length: 44 pages
Date of creation: 1992
Date of revision:
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policy making ; taxes ; household ; consumption;
Other versions of this item:
- Willem H. Buiter & Kenneth M. Kletzer, 1992. "Government Solvency, Ponzi Finance and the Redundancy and Usefulness of Public Debt," NBER Working Papers 4076, National Bureau of Economic Research, Inc.
- Buiter, Willem H & Kletzer, Kenneth, 1992. "Government Solvency, Ponzi Finance and the Redundancy and Usefulness of Public Debt," CEPR Discussion Papers 680, C.E.P.R. Discussion Papers.
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
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- John T. Cuddington, 1997. "Analysing the Sustainability of Fiscal Deficits in Developing Countries," International Finance 9706001, EconWPA.
- Buiter, Willem H, 1996.
"Aspects of Fiscal Performance in some Transition Economies under Fund-supported Programs,"
CEPR Discussion Papers
1535, C.E.P.R. Discussion Papers.
- W.H. Buiter, 1997. "Aspects of Fiscal Performance in Some Transition Economies Under Fund-Supported Programs," CEP Discussion Papers dp0333, Centre for Economic Performance, LSE.
- Willem H. Buiter, 1997. "Aspects of Fiscal Performance in Some Transition Economies Under Fund-Supported Programs," IMF Working Papers 97/31, International Monetary Fund.
- Cuddington, John T., 1997. "Analyzing the sustainability of fiscal deficitsin developing countries," Policy Research Working Paper Series 1784, The World Bank.
- Shuanglin Lin, 1994. "Capital taxation and accumulation in a growing world economy with deficit finance," International Tax and Public Finance, Springer, vol. 1(2), pages 127-146, October.
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