A Note on Public Debt, Tax-Exempt Bonds, and Ponzi Games
AbstractBy 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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Date of creation: 01 Jul 2007
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-09-16 (All new papers)
- NEP-DGE-2007-09-16 (Dynamic General Equilibrium)
- NEP-FMK-2007-09-16 (Financial Markets)
- NEP-PUB-2007-09-16 (Public Finance)
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