Working Paper（26-002E）Land, G versus R, and Infinite Debt Rollover

Since McCallum (1987), it has been 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 growth rate (R > G), precluding 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, a markedly different insight from the conventional view derived from the Diamond (1965) landless economy. We also examine the possibility of Pareto inefficient equilibria.

Keywords: infinite debt rollover, land, necessity of land bubble, Pareto (in)efficiency, Ponzi scheme, unbalanced growth.

JEL codes: D53, D61, E60, G12.