Rational bubbles and public debt policy: A quantitative analysis

David Domeij and Tore Ellingsen

Journal of Monetary Economics, 2018, vol. 96, issue C, 109-123

Abstract: Do empirically plausible dynastic general equilibrium models admit bubbles and Ponzi-schemes under rational expectations? Contrary to conventional wisdom, the answer is affirmative. The central assumption is that current securities do not represent claims to all future profits. Calibrating the model to U.S. data, we find that it is consistent with the presence of rational bubbles. The observed level of public debt is entirely a Ponzi-scheme. There are large welfare gains from eliminating bubbles on private assets and lodging all the non-fundamental asset value in public debt. Paying off public debt benefits only a small group of wealthy individuals.

Keywords: Bubbles; Incomplete markets; Fiscal policy (search for similar items in EconPapers)
JEL-codes: E21 E31 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:96:y:2018:i:c:p:109-123

DOI: 10.1016/j.jmoneco.2018.04.005

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