Stochastic optimal control modeling of debt crises

Jerome L. Stein

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.

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Year of publication:	September 2003
Authors:	Stein, Jerome L.
Publisher:	Munich : CESifo, Center for Economic Studies & Ifo Institute
Subject:	stochastic optimal control \| debt \| international finance \| US agricultural crisis \| Mean-Variance analysis \| Hamilton-Jacobi-Bellaman equation \| Internationale Staatsschulden \| International sovereign debt \| Wirtschaftswachstum \| Economic growth \| Handelsbilanz \| Trade balance \| Intertemporale Entscheidung \| Intertemporal choice \| Kontrolltheorie \| Control theory \| Stochastisches Wachstumsmodell \| Stochastic growth model \| Schuldenmanagement \| Debt management \| Theorie \| Theory