Are the No-Ponzi Game and the Transversality Conditions Relevant for Public Debt? A Keynesian Appraisal

Jean-Bernard Chatelain (1, 2) , Bruno Tinel (1) , Karim Azizi (1) , Nicolas Canry (1)

1 CES - Centre d'économie de la Sorbonne
2 PSE - Paris School of Economics

This paper investigates the relevance of the no-Ponzi game condition for public debt (i.e. the public debt growth rate has to be lower than the real interest rate, a necessary assumption for Ricardian equivalence) and the transversality condition for the GDP growth rate (i.e. the GDP growth rate has to be lower than the real interest rate). First, on the unbalanced panel of 21 countries from 1961 to 2010 available in OECD database, those two conditions were simultaneously validated only for 29% of the cases under examination. Second, those two conditions were more frequent in the 1980s and the 1990s following changes towards more restrictive monetary policies. Third, in tune with the Keynesian view, when the real interest rate is higher than the GDP growth, it corresponds to 75% of the cases of the increases of the debt/GDP ratio and to only 43% of the cases of the decreases of the debt/GDP ratio (fiscal consolidation).

Mots clés: Debt; Interest; Interest Rates; Monetary; Ricardian Equivalence

Domaines: Economies et finances

Jean-Bernard Chatelain, Bruno Tinel, Karim Azizi, Nicolas Canry. Are the No-Ponzi Game and the Transversality Conditions Relevant for Public Debt? A Keynesian Appraisal. European Journal of Economic and Social Systems, 2012, 25 (1-2), pp.39-58. ⟨hal-00686788⟩