Abstract: This study conducts simulation analyses to find the
optimal debt ceiling of Taiwan, while factoring in welfare
maximization under a dynamic stochastic general equilibrium
framework. The simulation is based on Taiwan's 2001 to 2011
economic data and shows that welfare is maximized at a debt/GDP
ratio of 0.2, increases in the debt/GDP ratio leads to increases in both
tax and interest rates and decreases in the consumption ratio and
working hours. The study results indicate that the optimal debt ceiling
of Taiwan is 20% of GDP, where if the debt/GDP ratio is greater than
40%, the welfare will be negative and result in welfare loss.