Are no-Ponzi game and transversality conditions relevant for public debt?

Karim Azizi (), Nicolas Canry (), Jean-Bernard Chatelain and Bruno Tinel ()
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Karim Azizi: Université Paris 1 Panthéon-Sorbonne
Bruno Tinel: Université Paris 1 Panthéon-Sorbonne

European Journal of Economic and Social Systems, 2012, vol. 25, issue 1-2, 45-58

Abstract: This paper investigates the relevance of the no-Ponzi game condition for public debt (i.e. the public debt growth rate has to be lower than the real interest rate, a necessary assumption for Ricardian equivalence) and the transversality condition for the GDP growth rate (i.e. the GDP growth rate has to be lower than the real interest rate). First, on the unbalanced panel of 21 countries from 1961 to 2010 available in OECD database, those two conditions were simultaneously validated only for 29% of the cases under examination. Second, those two conditions were more frequent in the 1980s and the 1990s following changes towards more restrictive monetary policies. Third, in tune with the Keynesian view, when the real interest rate is higher than the GDP growth, it corresponds to 75% of the cases of the increases of the debt/GDP ratio and to only 43% of the cases of the decreases of the debt/GDP ratio (fiscal consolidation).

Keywords: public debt solvency; no-Ponzi game condition; transversality condition; Keynesian countercyclical policy; monetary policy; economic growth (search for similar items in EconPapers)
JEL-codes: E62 E63 E64 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (8)

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