Debt management game and debt ceiling

Résumé

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.