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Licensed Unlicensed Requires Authentication Published by De Gruyter November 27, 2001

Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games under Uncertainty

Olivier Blanchard and Philippe Weil

In a dynamically efficient economy, can a government roll its debt forever and avoid the need to raise taxes? In a series of examples of economies with zero growth, this paper shows that such Ponzi games may be infeasible even when the average rate of return on bonds is negative, and may be feasible even when the average rate of return on bonds is positive. The paper then reveals the structure which underlies these examples.

Published Online: 2001-11-27

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