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Are No-Ponzi Game and Transversality Conditions Relevant for Public Debt? A Keynesian Appraisal

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Author Info

  • Karim Azizi
  • Nicolas Canry
  • Jean-Bernard Chatelain
  • Bruno Tinel

Abstract

This paper investigates the relevance of the No-Ponzi game condition for public debt (i.e. the public debt growth rate has to be lower than the real interest rate) and the transversality condition for the GDP growth rate (i.e. the GDP growth rate has to be lower than the real interest rate). First, it appears in OECD data, that over the last 40 years, those conditions were validated only for 24% of the cases under examination. Second, the No-Ponzi and the transversality conditions were more frequent in the 1980s and the 1990s following changes towards more restrictive monetary policies. Third, in line with the Keynesian view, the data show that cases where the real interest rate is lower than the GDP growth rate may also lead to public debt consolidation (i.e. a decrease in the debt to GDP ratio) in 26% of the cases, compared with only 19% corresponding to the textbook case in which both GDP and public debt growth rates are below the interest rate.

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File URL: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP296.pdf
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Bibliographic Info

Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp296.

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Date of creation: 2012
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Handle: RePEc:uma:periwp:wp296

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Related research

Keywords: Public debt solvency; No-Ponzi Game condition; transversality condition; Keynesian countercyclical policy; monetary policy; economic growth;

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References

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  1. Chatelain, Jean-Bernard & Ralf, Kirsten & Bruno, Amable, 2010. "Patents as Collateral," MPRA Paper 44698, University Library of Munich, Germany.
  2. Jean-Bernard Chatelain & Kirsten Ralf, 2012. "The Failure of Financial Macroeconomics and What to Do About it," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00706777, HAL.
  3. Kamihigashi, Takashi, 2005. "Necessity of the transversality condition for stochastic models with bounded or CRRA utility," Journal of Economic Dynamics and Control, Elsevier, vol. 29(8), pages 1313-1329, August.
  4. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  5. Muriel Pucci & Bruno Tinel, 2011. "Réductions d'impôts et dette publique en France," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(1), pages 125-148.
  6. Amable, Bruno & Azizi, Karim, 2011. "Varieties of capitalism and varieties of macroeconomic policy. Are some economies more procyclical than others?," MPIfG Discussion Paper 11/6, Max Planck Institute for the Study of Societies.
  7. Halkin, Hubert, 1974. "Necessary Conditions for Optimal Control Problems with Infinite Horizons," Econometrica, Econometric Society, vol. 42(2), pages 267-72, March.
  8. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
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