A Note on Public Debt, Tax-Exempt Bonds, and Ponzi Games
July 1, 2007
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Order a Print CopyDisclaimer: 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.
Subject: Bonds, Capital income tax, Public debt, Sovereign bonds, Stocks
Keywords: capital market, Ponzi game, WP
Pages:
18
Volume:
2007
DOI:
Issue:
162
Series:
Working Paper No. 2007/162
Stock No:
WPIEA2007162
ISBN:
9781451867268
ISSN:
1018-5941
