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The Deficit Gamble

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  • Laurence Ball
  • Douglas W. Elmendorf
  • N. Gregory Mankiw

Abstract

The historical behavior of interest rates and growth rates in U.S. data suggests that the government can, with a high probability, run temporary budget deficits and then roll over the resulting government debt forever. The purpose of this paper is to document this finding and to examine its implications. Using a standard overlapping-generations model of capital accumulation, we show that whenever a perpetual rollover of debt succeeds, policy can make every generation better off. This conclusion does not imply that deficits are good policy, for an attempt to roll over debt forever might fail. But the adverse effects of deficits, rather than being inevitable, occur with only a small probability.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5015.

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Date of creation: Feb 1995
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Publication status: published as Journal of Money, Credit and Banking, Vol. 30 (November 1998): 699-720.
Handle: RePEc:nbr:nberwo:5015

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  1. 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.
  2. Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 1988. "Mean Reversion in Equilibrium Asset Prices," NBER Working Papers 2762, National Bureau of Economic Research, Inc.
  3. Butkiewicz, James L., 1983. "The market value of outstanding government debt : Comment," Journal of Monetary Economics, Elsevier, vol. 11(3), pages 373-379.
  4. Peled, Dan, 1982. "Informational diversity over time and the optimality of monetary equilibria," Journal of Economic Theory, Elsevier, vol. 28(2), pages 255-274, December.
  5. Cass, David, 1972. "On capital overaccumulation in the aggregative, neoclassical model of economic growth: A complete characterization," Journal of Economic Theory, Elsevier, vol. 4(2), pages 200-223, April.
  6. Henning Bohn, . "The Sustainability of Budget Deficits with Lump-Sum and with Income-Based Taxation," Rodney L. White Center for Financial Research Working Papers 17-90, Wharton School Rodney L. White Center for Financial Research.
  7. Bohn, Henning, 1999. "Fiscal Policy and the Mehra-Prescott Puzzle: On the Welfare Implications of Budget Deficits When Real Interest Rates Are Low," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 1-13, February.
  8. repec:fth:calaec:8-93 is not listed on IDEAS
  9. Olivier J. Blanchard & Philippe Weil, 2001. "Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games under Uncertainty," Sciences Po publications info:hdl:2441/8607, Sciences Po.
  10. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1986. "Assessing Dynamic Efficiency: Theory and Evidence," NBER Working Papers 2097, National Bureau of Economic Research, Inc.
  11. David Romer, 1988. "What are the Costs of Excessive Deficits?," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 63-110 National Bureau of Economic Research, Inc.
  12. Benjamin M. Friedman, 1978. "Crowding Out or Crowding In? Economic Consequences of Financing Government Deficits," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 593-641.
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  1. Crowding Out and the Perils of Oversimplified Models
    by Tom Bozzo in angry bear on 2009-01-30 22:08:00
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