Infinite Debt Rollover in Stochastic Economies / Narayana R. Kocherlakota.

By:

Kocherlakota, Narayana R

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w30409.Publication details: Cambridge, Mass. National Bureau of Economic Research 2022.Description: 1 online resource: illustrations (black and white)Subject(s):

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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.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w30409 (Browse shelf(Opens below))	Not For Loan

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August 2022.

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.