Optimization in a Simulation Setting: Use of Function Approximation in Debt Strategy Analysis

David Bolder and Tiago Rubin

Staff Working Papers from Bank of Canada

Abstract: The stochastic simulation model suggested by Bolder (2003) for the analysis of the federal government's debt-management strategy provides a wide variety of useful information. It does not, however, assist in determining an optimal debt-management strategy for the government in its current form. Including optimization in the debt-strategy model would be useful, since it could substantially broaden the range of policy questions that can be addressed. Finding such an optimal strategy is nonetheless complicated by two challenges. First, performing optimization with traditional techniques in a simulation setting is computationally intractable. Second, it is necessary to define precisely what one means by an "optimal" debt strategy. The authors detail a possible approach for addressing these two challenges. They address the first challenge by approximating the numerically computed objective function using a function-approximation technique. They consider the use of ordinary least squares, kernel regression, multivariate adaptive regression splines, and projection-pursuit regressions as approximation algorithms. The second challenge is addressed by proposing a wide range of possible government objective functions and examining them in the context of an illustrative example. The authors' view is that the approach permits debt and fiscal managers to address a number of policy questions that could not be fully addressed with the current stochastic simulation engine.

Keywords: Debt management; Econometric and statistical methods; Fiscal policy; Financial markets (search for similar items in EconPapers)
JEL-codes: C0 C14 C15 C51 C52 C61 C65 E6 G1 H63 (search for similar items in EconPapers)
Pages: 92 pages
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Working Paper: Optimization in a Simulation Setting: Use of Function Approximation in Debt Strategy Analysis (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:07-13

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