Government Debt Control: Optimal Currency Portfolio and Payments

Ricardo Huaman and Abel Cadenillas ()
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Abel Cadenillas: Department of Mathematical and Statistical Sciences, University of Alberta, Edmonton, Alberta T6G 2G1, Canada

Operations Research, 2015, vol. 63, issue 5, 1044-1057

Abstract: Motivated by empirical facts, we develop a theoretical model for optimal currency government debt portfolio and debt payments, which allows both government debt aversion and jumps in the exchange rates. We obtain first a realistic stochastic differential equation for public debt and then solve explicitly the optimal currency debt problem. We show that higher debt aversion and jumps in the exchange rates lead to a lower proportion of optimal debt in foreign currencies. Furthermore, we show that for a government with extreme debt aversion it is optimal not to issue debt in foreign currencies. To the best of our knowledge, this is the first theoretical model that provides a rigorous explanation of why developing countries have reduced consistently their proportion of foreign debt in their debt portfolios.

Keywords: debt control; optimal currency debt portfolio; optimal debt payments; stochastic control (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (6)

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