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

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  • Olivier Blanchard

    (Department of Economics (Massachusetts University of Technology))

  • Philippe Weil

Abstract

In a dynamically efficient economy, can a government roll its debt forever and avoid the need to raise taxes? In a series of examples of economies with zero growth, this paper shows that such Ponzi games may be infeasible even when the average rate of return on bonds is negative, and may be feasible even when the average rate of return on bonds is positive. The paper then reveals the structure which underlies these examples.

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  • Olivier Blanchard & Philippe Weil, 2001. "Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games under Uncertainty," Sciences Po publications info:hdl:2441/8607, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/8607
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