Stochastic optimal control, international finance and debt
AbstractWe use stochastic optimal control-dynamic programming (DP) to derive the optimal foreign debt/net worth, consumption/net worth, current account/net worth, and endogenous growth rate in an open economy. Unlike the literature that uses an Intertemporal Budget Constraint (IBC) or the Maximum Principle, the DP approach does not require perfect foresight or certainty equivalence. Errors of measurement and the effects of unanticipated shocks are corrected in an optimal manner. We contrast the DP and IBC approaches, show how the results of the dynamic programming approach can be interpreted in a traditional simple mean-variance/Tobin-Markowitz context, and explain why our results are generalizations of the Merton model.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 28 (2004)
Issue (Month): 5 (May)
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Web page: http://www.elsevier.com/locate/jbf
Other versions of this item:
- Wendell Fleming & Jerome L. Stein, 2002. "Stochastic Optimal Control, International Finance and Debt," CESifo Working Paper Series 744, CESifo Group Munich.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Jerome Stein, 2005. "Optimal debt and equilibrium exchange rates in a Stochastic Environment: An Overview," Centre for International Economic Studies Working Papers 2005-12, University of Adelaide, Centre for International Economic Studies.
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