Debt management game and debt ceiling

Felix Dammann, Néofytos Rodosthenous and Stéphane Villeneuve

No 23-1430, TSE Working Papers from Toulouse School of Economics (TSE)

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: 2023-05-03
New Economics Papers: this item is included in nep-gth
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