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On the Feasibility of Debt Ponzi Schemes - A Bond Portfolio Approach


  • Martin Barbie
  • Marcus Hagedorn


This paper provides a general approach in the framework of a complete markets stochastic overlapping generations model to assess whether debt Ponzi schemes are feasible and Pareto-improving. We derive conditions in terms of bond interest rates of different maturities which can be used to assess different roll over strategies. Furthermore, we clarify how a dynamic roll over strategy of debt interacts with considerations in providing insurance against aggregate shocks by intergenerational risk sharing. A main result of this paper is that the feasibility of roll over strategies is unrelated to intergenerational insurance considerations that have received much attention in the literature. In fact, under the empirically relevant scenario of countercyclical real interest rates a Pareto improving roll over strategy of debt typically implies an increased variability of old age consumption. We develop a detailed intuition for our results along a series of examples

Suggested Citation

  • Martin Barbie & Marcus Hagedorn, 2004. "On the Feasibility of Debt Ponzi Schemes - A Bond Portfolio Approach," Econometric Society 2004 North American Winter Meetings 541, Econometric Society.
  • Handle: RePEc:ecm:nawm04:541

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    More about this item


    Government Debt; Debt Ponzi Scheme; Term Structure of Interest Rates;

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis


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