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Optimal foreign debt for Egypt: A stochastic control approach

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  • Abutaleb, Ahmed S.
  • Hamad, Marwa G.
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    Abstract

    This study assesses the foreign debt policy in Egypt and contrasts it versus the optimal policy during the period 1985–2008. It also presents a forecast of the optimal debt during the period 2009–2014. The optimal debt policy was derived using an open economy model for Egypt. The uncertainties in the model stem from the uncertainties in the interest or debt service payments and the uncertainties in the rate of return on investments. The stochastic control approach was used to find the optimal debt policy. It was found that Egypt could borrow externally as long as the trend in the rate of return on investments exceeds the trend in the real interest rate or the trend in the rate of the debt service payments. The analysis finds that Egypt's foreign debt was higher than the optimal level before 1997. After 1997, foreign debt seems to converge to the optimal level. However, Egypt's foreign debt is still below its optimal level which results in an opportunity cost for the economy to grow, otherwise, GDP could have recorded a favorable increase.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0264999311002835
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    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 29 (2012)
    Issue (Month): 3 ()
    Pages: 544-556

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    Handle: RePEc:eee:ecmode:v:29:y:2012:i:3:p:544-556

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    Web page: http://www.elsevier.com/locate/inca/30411

    Related research

    Keywords: Optimal debt; Foreign debt; Stochastic control; Fiscal policy;

    References

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    1. Paul R. Krugman, 1988. "Financing vs. Forgiving a Debt Overhang," NBER Working Papers 2486, National Bureau of Economic Research, Inc.
    2. Stein, Jerome L., 2007. "United States current account deficits: A stochastic optimal control analysis," Journal of Banking & Finance, Elsevier, vol. 31(5), pages 1321-1350, May.
    3. Jonathan Eaton, 1991. "Sovereign Debt: A Primer," Boston University - Institute for Economic Development 21, Boston University, Institute for Economic Development.
    4. Catherine Pattillo & Hélène Poirson & Luca Antonio Ricci, 2011. "External Debt and Growth," Review of Economics and Institutions, Università di Perugia, vol. 2(3).
    5. Ugo Panizza, 2008. "Domestic And External Public Debt In Developing Countries," UNCTAD Discussion Papers 188, United Nations Conference on Trade and Development.
    6. Fleming, Wendell H. & Stein, Jerome L., 2004. "Stochastic optimal control, international finance and debt," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 979-996, May.
    7. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
    8. Toan Quoc Nguyen & Benedict J. Clements & Rina Bhattacharya, 2003. "External Debt, Public Investment, and Growth in Low-Income Countries," IMF Working Papers 03/249, International Monetary Fund.
    9. Menoncin, Francesco, 2002. "Optimal portfolio and background risk: an exact and an approximated solution," Insurance: Mathematics and Economics, Elsevier, vol. 31(2), pages 249-265, October.
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