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

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) 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, it appears in OECD data, that over the last 40 years, those conditions were validated only for 24% of the cases under examination. Second, the No-Ponzi and the transversality conditions were more frequent in the 1980s and the 1990s following changes towards more restrictive monetary policies. Third, in line with the Keynesian view, the data show that cases where the real interest rate is lower than the GDP growth rate may also lead to public debt consolidation (i.e. a decrease in the debt to GDP ratio) in 26% of the cases, compared with only 19% corresponding to the textbook case in which both GDP and public debt growth rates are below the interest rate.