Government Ponzi Games and Debt Dynamics Under Uncertainty

Author/Editor:

Leonardo Bartolini ; Carlo Cottarelli

Publication Date:

December 1, 1991

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:

We investigate the conditions for sustainability of debt roll-over schemes under uncertainty. In contrast with the requirements identified in recent research, we show that a necessary and sufficient condition for sustainability of such schemes is that the asymptotic interest rate on government debt be lower than the asymptotic growth rate of the economy, a natural extension of a familiar criterion in a deterministic framework. However, we also show that for realistic parameter values, Ponzi games that are sustainable in the long run may display explosive patterns over relatively long horizons. This may explain why governments may be reluctant to play Ponzi games even when they are feasible in the long run.

Series:

Working Paper No. 91/126

English

Publication Date:

December 1, 1991

ISBN/ISSN:

9781451854862/1018-5941

Stock No:

WPIEA1261991

Format:

Paper

Pages:

26

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