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On the Failure to Reach the Optimal Government Debt Ceiling

Author

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  • Abel Cadenillas

    (Department of Mathematical and Statistical Sciences, University of Alberta, Central Academic Building 639, Edmonton, AB T6G 2G1, Canada)

  • Ricardo Huamán-Aguilar

    (Department of Economics, Pontificia Universidad Católica del Perú, Av. Universitaria 1801, San Miguel, Lima 32, Peru)

Abstract

We develop a government debt management model to study the optimal debt ceiling when the ability of the government to generate primary surpluses to reduce the debt ratio is limited. We succeed in finding a solution for the optimal debt ceiling. We study the conditions under which a country is not able to reduce its debt ratio to reach its optimal debt ceiling, even in the long run. In addition, this model with bounded intervention is consistent with the fact that, in reality, countries that succeed in reducing their debt ratio do not do so immediately, but over some period of time. To the best of our knowledge, this is the first theoretical model on the debt ceiling that accounts for bounded interventions.

Suggested Citation

  • Abel Cadenillas & Ricardo Huamán-Aguilar, 2018. "On the Failure to Reach the Optimal Government Debt Ceiling," Risks, MDPI, vol. 6(4), pages 1-28, December.
    • Handle: RePEc:gam:jrisks:v:6:y:2018:i:4:p:138-:d:187810
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    References listed on IDEAS

    as
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    Cited by:

    1. Dammann, Felix & Rodosthenous, Néofytos & Villeneuve, Stéphane, 2024. "A Stochastic Non-Zero-Sum Game of Controlling the Debt-to-GDP Ratio," TSE Working Papers 24-1481, Toulouse School of Economics (TSE).
    2. Dammann, Felix & Rodosthenous, Néofytos & Villeneuve, Stéphane, 2023. "Debt management game and debt ceiling," TSE Working Papers 23-1430, Toulouse School of Economics (TSE).
    3. Giorgia Callegaro & Claudia Ceci & Giorgio Ferrari, 2019. "Optimal Reduction of Public Debt under Partial Observation of the Economic Growth," Papers 1901.08356, arXiv.org, revised Jan 2019.
    4. Matteo Brachetta & Claudia Ceci, 2021. "A Stochastic Control Approach to Public Debt Management," Papers 2107.10491, arXiv.org.
    5. M. Brachetta & C. Ceci, 2022. "A stochastic control approach to public debt management," Mathematics and Financial Economics, Springer, volume 16, number 5, December.
    6. Jussi Lindgren, 2021. "Examination of Interest-Growth Differentials and the Risk of Sovereign Insolvency," Risks, MDPI, vol. 9(4), pages 1-14, April.
    7. Barbara Annicchiarico & Fabio Di Dio & Stefano Patrì, 2023. "Optimal correction of the public debt and measures of fiscal soundness," Metroeconomica, Wiley Blackwell, vol. 74(1), pages 138-162, February.
    8. Giorgia Callegaro & Claudia Ceci & Giorgio Ferrari, 2020. "Optimal reduction of public debt under partial observation of the economic growth," Finance and Stochastics, Springer, vol. 24(4), pages 1083-1132, October.
    9. Callegaro, Giorgia & Ceci, Claudia & Ferrari, Giorgio, 2019. "Optimal Reduction of Public Debt under Partial Observation of the Economic Growth," Center for Mathematical Economics Working Papers 608, Center for Mathematical Economics, Bielefeld University.

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