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On the long-term trends of public debt. Implications of the government’s Ponzi game and ageing

Zsuzsa Mosolygó
Chief Economist, Government Debt Management Agency
Published in: Public Finance Quarterly 2011/4 (p. 446-473.)

SUMMARY: This paper sets out to analyse the impact of global ageing on the financeability of states. It covers issues regarding the sustainability of public debt and theories addressing the repayability of debt. It presents the possibilities of a fiscal Ponzi game, which would allow the financing of the debt burden from borrowings and enable succeeding generations to roll over public debt. Sustainability depends greatly on the relationship between interest rates and economic growth, and if the growth rate exceeds the interest rate charged on public debt, the Ponzi game will not only be feasible, but it will also have a Pareto optimal outcome. However, if the growth rate is lower than the interest rate, the Ponzi scheme cannot be run over the long term. The global ageing of the population fundamentally changes the financing environment of countries and government debt. The financing terms of public debt worsen significantly as baby boomers reach retirement age. The soaring old-age dependency ratio exacerbates the relationship between interest and economic growth. The primary balance effects are dramatic. This increases the supply of demography-related government securities, while the demand for government papers diminishes amid declining macro level savings. Over the coming decades, this may give rise to unusual price and quantity problems on a global scale across government paper markets. Grasping the issues of public debt is particularly relevant in the context of current global and domestic debt developments. The ongoing debt crisis is further compounded by demographic tensions. In point of fact, from an intuitive perspective, the countdown to the retirement of baby boomers may well be one of the underlying reasons for the debt crisis, if not for the entire global financial crisis.

KEYWORDS: ageing, public debt, sustainability, Ponzi game


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