Working Paper: NBER ID: w30409
Authors: Narayana R. Kocherlakota
Abstract: This paper shows that there is more scope for a borrower to engage in a sustainable infinite debt rollover (a “Ponzi scheme”) when interest/growth rates are stochastic. In this context, I prove that the relevant “r vs. g” comparison uses the yield r_{long} to an infinite-maturity zero-coupon bond. I show that r_{long} is lower than the (risk-neutral) expectation of the short-term yield when it is variable, and that r_{long} is close to the minimal realization of the short-term yield when it is highly persistent. The paper applies these results to illustrative heterogeneous agent dynamic stochastic general equilibrium models to obtain weak sufficient conditions for the existence of public debt bubbles.
Keywords: No keywords provided
JEL Codes: E43; E52; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sustainable infinite debt rollover (H63) | rlong <= g (C20) |
| variability of short-term yields (E43) | rlong (Y60) |
| high persistence of short-term yields (E43) | rlong (Y60) |