Land and Infinite Debt Rollover

Abstract

Since McCallum (1987), it is well known that in an overlapping generations (OLG) economy with land, the equilibrium is Pareto efficient because with balanced growth, the interest rate exceeds the economic growth rate ($R>G$), which rules out infinite debt rollover (a Ponzi scheme). We show that once we remove knife-edge restrictions on the production function and allow unbalanced growth, under some conditions an efficient equilibrium with land bubbles necessarily emerges and infinite debt rollover becomes possible, which is a markedly different insight from the conventional view derived from the Diamond (1965) landless economy. We also examine the possibility of Pareto inefficient equilibria.