On Fiscal PONZI Games in a World Economy with Overlapping Generations

  • Michael Schmid
Part of the Studies in International Economics and Institutions book series (INTERN.ECONOM.)


Problems surrounding the growth of public debt have been studied anew during the debt-ridden eighties. The survey by Buiter (1985) and the CEPS paper by Blanchard, Buiter, and Dornbusch (1985) offer a wide and balanced view of public deficits and debt (see also Spaventa (1987)). The present paper is confined to what these authors have dubbed ‘old-fashioned classical crowding out’ or ‘full-employment capital accumulation’. The new twist given to the old debate in this article is gained from the assumption of overlapping generations engaged in an ‘economic war of ages’2 and an explicit consideration of national governments competing in a completely integrated international capital market by issuance of public bonds.3 Secondly, by looking at real capital formation and real government debt simultaneously, I try to avoid a dichotomy frequently found in the literature. There the sustainability of fiscal rules is analysed in a book-keeping manner, i.e., neglecting the effect of fiscal rules on the behavior of the private economy. The simple method of coping with this important interrelatedness between public credit and private capital formation is a thorough application of dynamic system analysis, i.e., specifically phase-diagram techniques.


Public Debt Balance Budget Government Debt External Debt Primary Surplus 
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© Springer-Verlag Berlin Heidelberg 1990

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  • Michael Schmid

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