Government Ponzi Games and Debt Dynamics Under Uncertainty
December 1, 1991
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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.
Subject: Debt sustainability analysis, External debt, Financial sector policy and analysis, National accounts, Personal income, Production, Production growth, Public debt, Solvency
Keywords: debt boundedness, debt ratio, debt ratio trend, Debt sustainability analysis, government solvency, growth rate-interest rate differential, interest rate, interest rate trend, no-Ponzi-game condition, output growth rate, output growth-interest rate differential, Personal income, Ponzi game, Production growth, Solvency, stochastic process, WP
Pages:
26
Volume:
1991
DOI:
Issue:
126
Series:
Working Paper No. 1991/126
Stock No:
WPIEA1261991
ISBN:
9781451854862
ISSN:
1018-5941
