On the Feasibility of Debt Ponzi Schemes - A Bond Portfolio Approach

Martin Barbie and Marcus Hagedorn

No 541, Econometric Society 2004 North American Winter Meetings from Econometric Society

Abstract: This paper provides a general approach in the framework of a complete markets stochastic overlapping generations model to assess whether debt Ponzi schemes are feasible and Pareto-improving. We derive conditions in terms of bond interest rates of different maturities which can be used to assess different roll over strategies. Furthermore, we clarify how a dynamic roll over strategy of debt interacts with considerations in providing insurance against aggregate shocks by intergenerational risk sharing. A main result of this paper is that the feasibility of roll over strategies is unrelated to intergenerational insurance considerations that have received much attention in the literature. In fact, under the empirically relevant scenario of countercyclical real interest rates a Pareto improving roll over strategy of debt typically implies an increased variability of old age consumption. We develop a detailed intuition for our results along a series of examples

Keywords: Government Debt; Debt Ponzi Scheme; Term Structure of Interest Rates (search for similar items in EconPapers)
JEL-codes: D61 E43 H63 (search for similar items in EconPapers)
Date: 2004-08-11
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:ecm:nawm04:541

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