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Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games Under Uncertainty

  • Olivier Jean Blanchard
  • Philippe Weil

Can governments roll their debt over forever in dynamically efficient economies, and thus avoid the need to raise taxes? While the answer is a clear no under certainty, it depends, under uncertainty, on whether public debt provides intergenerational insurance. When it does not, rollover is not possible, even if the rate of return on one-period bonds is below the growth rate. When it does, debt rollover may be possible, even if the return on one-period bonds is above the growth rate.

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File URL: http://www.nber.org/papers/w3992.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3992.

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Date of creation: Feb 1992
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Publication status: published as Advances in Macroeconomics (2001), vol. 1, issue 2, article 3, http://www.bepress.com/bejm/advances/vol1/iss2/art3.
Handle: RePEc:nbr:nberwo:3992
Note: AP EFG
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  1. 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.
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  8. Bohn, Henning, 1995. "The Sustainability of Budget Deficits in a Stochastic Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 257-71, February.
  9. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  10. Kocherlakota, N.R., 1990. "Bubbles and Constraints on Debt Accumulation," Working Papers 90-29, University of Iowa, Department of Economics.
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  13. Weil, Philippe, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 29-42, February.
  14. Gottardi, Piero, 1996. "Stationary Monetary Equilibria in Overlapping Generations Models with Incomplete Markets," Journal of Economic Theory, Elsevier, vol. 71(1), pages 75-89, October.
  15. Rao Aiyagari, S. & Peled, Dan, 1991. "Dominant root characterization of Pareto optimality and the existence of optimal equilibria in stochastic overlapping generations models," Journal of Economic Theory, Elsevier, vol. 54(1), pages 69-83, June.
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  17. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
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