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Ponzi game in OLG model with endogenous growth and productive government spending

Author

Listed:
  • Philippe Darreau

    () (LAPE, University of Limoges)

  • François Pigalle

    () (LAPE, University of Limoges)

Abstract

Barro's model is an AK model, and there cannot be dynamic inefficiency since the social yield of the capital is higher than the growth rate. But it may be that the private yield and thus the interest rate are lower than the growth rate. One can thus have a Ponzi game and the government can allow a permanent roll-over of debt and cut taxes. However we show that in this model since the capital is under-accumulated, playing a Ponzi game produces a crowding-out of capital and reduces the growth rate and welfare. The practical message of this article is that even when the interest rate is lower than the growth rate, the public debt is not a Pareto improvement when it generates a crowding-out of capital and reduces endogenous growth.

Suggested Citation

  • Philippe Darreau & François Pigalle, 2011. "Ponzi game in OLG model with endogenous growth and productive government spending," Economics Bulletin, AccessEcon, vol. 31(3), pages 2509-2520.
  • Handle: RePEc:ebl:ecbull:eb-11-00190
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    File URL: http://www.accessecon.com/Pubs/EB/2011/Volume31/EB-11-V31-I3-P225.pdf
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    References listed on IDEAS

    as
    1. Ghosh, Sugata & Mourmouras, Iannis A., 2004. "Endogenous growth, welfare and budgetary regimes," Journal of Macroeconomics, Elsevier, vol. 26(4), pages 623-635, December.
    2. Alexandru Minea & Patrick Villieu, 2009. "Borrowing to Finance Public Investment? The 'Golden Rule of Public Finance' Reconsidered in an Endogenous Growth Setting," Fiscal Studies, Institute for Fiscal Studies, vol. 30(1), pages 103-133, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Public debt; public spending; endogenous growth; Ponzi game;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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