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Infinite Debt Rollover in Stochastic Economies

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  • Narayana R. Kocherlakota

Abstract

This paper shows that there is more scope for a borrower to engage in a sustainable infinite debt rollover (a “Ponzi scheme”) when interest/growth rates are stochastic. In this context, I prove that the relevant “r vs. g” comparison uses the yield rlong to an infinite‐maturity zero‐coupon bond. I show that rlong is lower than the risk‐neutral expectation of the short‐term yield when it is variable, and that rlong is close to the minimal realization of the short‐term yield when it is highly persistent. The paper applies these results to illustrative heterogeneous agent dynamic stochastic general equilibrium models to obtain similarly weakened sufficient conditions for the existence of public debt bubbles.

Suggested Citation

  • Narayana R. Kocherlakota, 2023. "Infinite Debt Rollover in Stochastic Economies," Econometrica, Econometric Society, vol. 91(5), pages 1629-1658, September.
    • Handle: RePEc:wly:emetrp:v:91:y:2023:i:5:p:1629-1658
    DOI: 10.3982/ECTA21090
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    References listed on IDEAS

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    1. Olivier Blanchard, 2019. "Public Debt and Low Interest Rates," American Economic Review, American Economic Association, vol. 109(4), pages 1197-1229, April.
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    Cited by:

    1. Jean-Baptiste Michau, 2022. "The Trilemma for Low Interest Rate Macroeconomics," Working Papers 2022-19, Center for Research in Economics and Statistics.

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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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