Model of Government Ponzi Games and Debt Dynamics Under Uncertainty

This study examines the effects of fiscal policy on the economy under uncertainty of public debt. Fiscal policy refers to the actions of government in collecting and spending private resources. As its title suggests, the paper is concerned with the dynamic aspects of fiscal policy. These include the effects of fiscal policies on capital formation, economic growth, and intergenerational equity; the influence of long-run expectations on short-run outcomes; and the restrictions imposed by current policies on the set of feasible future policies. Dynamic analysis has recently gained favor over static analysis in various fields of economics. It is particularly appropriate for the study of fiscal policy, which, at least in the Republic of Moldova, is frequently adjusted and altered. Such changes are often explicitly legislated in advance, but when not pre-announced they may often be surmised from current fiscal conditions. That fiscal variables are continually modified is not surprising. Current policy changes alter the course of the economy and invariably require additional policy changes in the future. But the anticipation of such future changes also alters current outcomes; indeed the current impact of fiscal decisions cannot be determined without considering the entire future time path of fiscal policy. A dynamic perspective is also crucial in weighting the short-run benefits of particular policies (e.g., tax cuts) against long-run losses (e.g., crowding out) and in evaluating the economic efficiency of alternative policies. Economic efficiency refers to the potential for improving the welfare of some segment of society without reducing that of another. Static analysis is ill-equipped to examine economic efficiency because it ignores a vast segment of society, namely, all future generations. Dynamic analysis considers both current and future generations and permits one to distinguish policies that truly improve economic efficiency from those that simply redistribute resources across generations