Stochastic Optimal Control Modeling of Debt Crises

By Jerome l. Stein. Social Science Research Network, 2003

75 citations recorded by the source corpus.

What is an optimal or a sustainable external debt - for a country, region or sector? How should one monitor and evaluate debt to preclude a crisis? We use stochastic optimal control/dynamic programming to derive an optimal debt. The deviation of the actual from the optimal will serve as a Warning Signal of a crisis. There is a correspondence between Hamilton-Jacobi-Bellman equation of Dynamic Programming and the static Mean-Variance (M-V) analysis in finance. A graphic analysis of M-V is helpful to explain the implications of DP. An explicit example is the US Agricultural debt crisis.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/39e2d86d8f2defa36db519cf73e5a5131e5f54a6