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Debt management game and debt ceiling

Author

Listed:
  • Dammann, Felix
  • Rodosthenous, Néofytos
  • Villeneuve, Stéphane

Abstract

We introduce a non zero-sum game between a government and a legislative body to study the optimal level of debt. We succeed in characterising Nash equilibria in the class of Skorokhodreflection policies which implies that the legislator imposes a debt ceiling. In addition, we highlight the importance of the time preferences in the magnitude of the optimal level of the statutory debt ceiling. In particular, we show that laissez-faire policy can be optimal for high values of the legislator’s discount rate.

Suggested Citation

  • Dammann, Felix & Rodosthenous, Néofytos & Villeneuve, Stéphane, 2023. "Debt management game and debt ceiling," TSE Working Papers 23-1430, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:128069
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    References listed on IDEAS

    as
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    Keywords

    non-zero-sum game; singular stochastic control; free-boundary problem; debt-to-GDP ratio;
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