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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 28 (2004)
Issue (Month): 5 (May)
Contact details of provider:
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.:
- Gandolfo, Giancarlo & Goldberg, Michael D., 2005. "International Finance And Open-Economy Macroeconomics," Macroeconomic Dynamics, Cambridge University Press, vol. 9(02), pages 263-266, April.
- Jerome L. Stein & Giovanna Paladino, 2001.
"Country Default Risk: An Empirical Assessment,"
2001-08, Brown University, Department of Economics.
- Stein, Jerome L. & Paladino, Giovanna, 1997. "Recent developments in international finance: A guide to research," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1685-1720, December.
- Infante, Ettore F & Stein, Jerome L, 1973. "Optimal Growth with Robust Feedback Control," Review of Economic Studies, Wiley Blackwell, vol. 40(1), pages 47-60, January.
- Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867-1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, July.
- Stein, Jerome L., 2010.
"A tale of two debt crises: a stochastic optimal control analysis,"
Economics - The Open-Access, Open-Assessment E-Journal,
Kiel Institute for the World Economy, vol. 4(3), pages 1-24.
- Jerome L. Stein, 2008. "A Tale of Two Debt Crises: A Stochastic Optimal Control Analysis," CESifo Working Paper Series 2220, CESifo Group Munich.
- Stein, Jerome L., 2009. "A tale of two debt crises: a stochastic optimal control analysis," Economics Discussion Papers 2009-44, Kiel Institute for the World Economy.
- Jerome L. Stein, 2004.
"Optimal Debt and Equilibrium Exchange Rates in a Stochastic Environment: an Overview,"
CESifo Working Paper Series
1363, CESifo Group Munich.
- 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.
- Stein, Jerome L., 2011.
"The crisis, Fed, Quants and stochastic optimal control,"
Elsevier, vol. 28(1-2), pages 272-280, January.
- Stein, Jerome L., 2011. "The crisis, Fed, Quants and stochastic optimal control," Economic Modelling, Elsevier, vol. 28(1), pages 272-280.
- Abutaleb, Ahmed S. & Hamad, Marwa G., 2012. "Optimal foreign debt for Egypt: A stochastic control approach," Economic Modelling, Elsevier, vol. 29(3), pages 544-556.
- Kwamie Dunbar, 2009. "Stochastic Business Cycle Volatilities, Capital Accumulation and Economic Growth: Lessons from the Global Credit Market Crisis," Working papers 2009-36, University of Connecticut, Department of Economics.
- Jerome L. Stein, 2006.
"United States Current Account Deficits: A Stochastic Optimal Control Analysis,"
CESifo Working Paper Series
1805, CESifo Group Munich.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.