Infinite Debt Rollover in Stochastic Economies
Econometrica · 2023 · Volume 91 · Issue 5
Abstract
This paper shows that there ismorescope for a borrower to engage in asustainable 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 yieldrlongto an infinite-maturity zero-coupon bond. I show thatrlongis lower than the risk-neutral expectation of the short-term yield when it is variable, and thatrlongis 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 similarly weakened sufficient conditions for the existence of public debt bubbles.
Keywords
Ponzi schemes, stochastic economies, bubbles
Enable JavaScript for citation tools and additional paper interactions.