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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Paper provided by International Monetary Fund in its series IMF Working Papers with number
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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, vol. 29(3), pages 431-50, August.
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Laurence Ball & Douglas W. Elmendorf & N. Gregory Mankiw, 1995.
"The Deficit Gamble,"
NBER Working Papers
5015, National Bureau of Economic Research, Inc.
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