Debt management game and debt ceiling

Felix Dammann, Néofytos Rodosthenous and Stéphane Villeneuve ()
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Felix Dammann: Universität Bielefeld = Bielefeld University
Néofytos Rodosthenous: UCL - University College of London [London]
Stéphane Villeneuve: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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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.

Keywords: Non-zero-sum game; Singular stochastic control; Free-boundary problem; Debt-to-GDP ratio (search for similar items in EconPapers)
Date: 2025-02-27
Note: View the original document on HAL open archive server: https://hal.science/hal-04969514v1
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