Government Solvency, Austerity and Fiscal Consolidation in the OECD: A Keynesian Appraisal of Transversality and No Ponzi Game Conditions

TL;DR

This study examines the applicability of No-Ponzi game and transversality conditions to public debt and GDP growth in OECD countries, revealing their limited validity and their relation to fiscal policy periods and debt dynamics.

Contribution

It provides an empirical analysis of the conditions' validity across multiple countries and decades, linking them to Keynesian fiscal perspectives and policy cycles.

Findings

Only 29% of cases satisfy both conditions simultaneously.

Conditions were more frequent during the 1980s and 1990s.

Higher real interest rates are associated with debt increases in 75% of cases.

Abstract

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 of 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 when monetary policies were more restrictive. 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 but to only 43% of the cases of the decreases of the debt/GDP ratio (fiscal consolidations).