Working Paper: NBER ID: w3992
Authors: Olivier Jean Blanchard; Philippe Weil
Abstract: Can governments roll their debt over forever in dynamically efficient economies, and thus avoid the need to raise taxes? While the answer is a clear no under certainty, it depends, under uncertainty, on whether public debt provides intergenerational insurance. When it does not, rollover is not possible, even if the rate of return on one-period bonds is below the growth rate. When it does, debt rollover may be possible, even if the return on one-period bonds is above the growth rate.
Keywords: Dynamic Efficiency; Riskless Rate; Debt; Ponzi Games; Uncertainty
JEL Codes: E62; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| public debt provides intergenerational insurance (H60) | rollover of debt is feasible (F34) |
| public debt does not provide intergenerational insurance (H60) | rollover of debt is not feasible (G32) |
| average riskless rate being negative (E43) | expected debt-to-GNP ratio can grow at a positive rate (H69) |
| negative average riskless rate does not preclude possibility of a Ponzi debt game (G19) | structure of overlapping generations and incomplete market participation leads to different outcomes regarding debt rollover (D52) |