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A Noteon Public Debt, Tax-Exempt Bonds, and Ponzi Games

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  • Berthold U. Wigger

Abstract

By issuing tax-exempt bonds, the government can incur debt and never pay back any principal or interest, even if the economy without public debt evolves on a dynamically efficient growth path. The welfare effects of such a Ponzi type borrowing scheme are mixed. The current young will unambiguously benefit.Depending on preferences and the aggregate technology, also a finite number of subsequent generations may benefit. The welfare of all generations thereafter, however, will be lower than in the economy without public debt.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/162.

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Length: 18
Date of creation: 01 Jul 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/162

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Keywords: Public debt; bonds; public bonds; tax-exempt bonds; bond; taxation; private bonds; stock of capital; debt service; asset bubbles; public finance; tax revenue; bond market; fiscal affairs; fiscal affairs department;

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References

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  1. Ball, Laurence & Elmendorf, Douglas W & Mankiw, N Gregory, 1998. "The Deficit Gamble," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(4), pages 699-720, November.
  2. Grossman, Gene M. & Yanagawa, Noriyuki, 1993. "Asset bubbles and endogenous growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(1), pages 3-19, February.
  3. Berthold Wigger, 2005. "Public Debt, Human Capital Formation, and Dynamic Inefficiency," International Tax and Public Finance, Springer, Springer, vol. 12(1), pages 47-59, January.
  4. Galor, Oded & Ryder, Harl E., 1991. "Dynamic efficiency of steady-state equilibria in an overlapping-generations model with productive capital," Economics Letters, Elsevier, Elsevier, vol. 35(4), pages 385-390, April.
  5. John Norregaard, 1997. "The Tax Treatment of Government Bonds," IMF Working Papers 97/25, International Monetary Fund.
  6. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 431-50, August.
  7. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1499-1528, November.
  8. Chalk, Nigel A., 2000. "The sustainability of bond-financed deficits: An overlapping generations approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 45(2), pages 293-328, April.
  9. King, Ian & Ferguson, Don, 1993. "Dynamic inefficiency, endogenous growth, and Ponzi games," Journal of Monetary Economics, Elsevier, Elsevier, vol. 32(1), pages 79-104, August.
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Cited by:
  1. Zsuzsa Mosolygó, 2011. "On the long-term trends of public debt. Implications of the government’s Ponzi game and ageing," Public Finance Quarterly, State Audit Office of Hungary, State Audit Office of Hungary, vol. 56(4), pages 446-473.
  2. Yasuoka, Masaya & Miyake, Atsushi, 2013. "Public debt, child allowances and pension benefits with endogenous fertility," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 7(11), pages 1-25.

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