Ponzi Finance, Government Solvency and the Redundancy or Usefulness of Public Debt

Willem Buiter and Kenneth Kletzer

No 1070, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We study how the government's ability to borrow depends on its capacity to tax. Using a two-period OLG growth model, we establish the following. When lump-sum taxes are unrestricted, Ponzi finance is possible, regardless of whether the economy is dynamically inefficient and regardless of the relationship between the interest rate and the growth rate. Ponzi finance, and government debt generally, is unessential or redundant: it does not enlarge the set of allocations that can be supported as competitive equilibria. When lump-sum taxes are restricted, Ponzi finance (public debt) may be essential. Central to the paper is our characterization of feasible government fiscal-financial plans for an infinite-lived government facing a sequence of finite-lived overlapping private generations. The central idea is that the government does not bankrupt private agents. We contrast our criterion with the conventional government solvency constraint. The conventional solvency constraint (the present value of future government debt is non-positive in the infinitely distant future) is neither necessary nor sufficient for our feasibility criterion. When the government must use distortionary taxes and the long-run interest rate exceeds the long-run growth rate, our feasibility criterion implies the conventional solvency constraint.

Pages: 48 pages
Date: 1994-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://cowles.yale.edu/sites/default/files/files/pub/d10/d1070.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cwl:cwldpp:1070

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University Yale University, Box 208281, New Haven, CT 06520-8281 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Brittany Ladd ().