Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games Under Uncertainty
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.