A Note on Public Debt, Tax-Exempt Bonds, and Ponzi Games
IMF Working Papers, July 1, 2007
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- A Note on Public Debt, Tax-Exempt Bonds, and Ponzi Games
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Bibliographic details
- Authors: Berthold U. Wigger
- Published: July 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451867268.001
Overview
- 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 paper analyzes welfare effects of such a Ponzi-type borrowing scheme across generations.
Main findings
- The welfare effects of a Ponzi-type borrowing scheme are mixed.
- The current young will unambiguously benefit.
- Depending on preferences and the aggregate technology, a finite number of subsequent generations may also benefit.
- The welfare of all generations thereafter will be lower than in the economy without public debt.
Welfare implications and scenarios
- Scenario: Government issues tax-exempt bonds and never repays principal or interest.
- Immediate effect: current young gain welfare benefits.
- Intermediate effect: under some preference and technology configurations, a finite number of subsequent generations may gain.
- Long-run effect: all generations after that finite set experience lower welfare than in the no-public-debt economy.
- Key mechanism: intergenerational redistribution generated by perpetually outstanding tax-exempt sovereign bonds in an otherwise dynamically efficient economy.
Subject and keywords
- Subject: Bonds, Capital income tax, Public debt, Sovereign bonds, Stocks
- Keywords: capital market, Ponzi game, WP
IMF Working Paper — A Note on Public Debt, Tax-Exempt Bonds, and Ponzi Games (Berthold U. Wigger, July 1, 2007).
Content in this bundle
- A Note on Public Debt, Tax-Exempt Bonds, and Ponzi Games — Section 1