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

Olivier J. Blanchard (1) , Philippe Weil (2)

1 MIT Department of Economics
2 OFCE - Observatoire français des conjonctures économiques (Sciences Po)

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.

Domaines: Economies et finances

Olivier J. Blanchard, Philippe Weil. Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games under Uncertainty. Advances in Macroeconomics, 2001, 1 (2), pp.1-23. ⟨10.2202/1534-6013.1031⟩. ⟨hal-01030812⟩