Stochastic Optimal Control Modeling of Debt Crises

Jerome Stein

No 1043, CESifo Working Paper Series from CESifo

Abstract: 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.

Keywords: stochastic optimal control; debt; international finance; US agricultural crisis; Mean-Variance analysis; Hamilton-Jacobi-Bellaman equation (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (8)

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