A Note on Public Debt, Tax-Exempt Bonds, and Ponzi Games

Author/Editor:

Berthold U. Wigger

Publication Date:

July 1, 2007

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

By issuing tax-exempt bonds, the government can incur debt and never pay back any principal or interest, even if the economy without public debt evolves on a dynamically efficient growth path. The welfare effects of such a Ponzi type borrowing scheme are mixed. The current young will unambiguously benefit.Depending on preferences and the aggregate technology, also a finite number of subsequent generations may benefit. The welfare of all generations thereafter, however, will be lower than in the economy without public debt.

Series:

Working Paper No. 2007/162

Subject:

English

Publication Date:

July 1, 2007

ISBN/ISSN:

9781451867268/1018-5941

Stock No:

WPIEA2007162

Pages:

18

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