Stochastic Optimal Control, International Finance, and Debt Crises
AbstractThis book focuses on the interaction between equilibrium real exchange rates, optimal external debt, endogenous optimal growth and current account balances, in a world of uncertainty. The theoretical parts result from interdisciplinary research between economics and applied mathematics. From the economic theory and the mathematics of stochastic optimal control the author derives benchmarks for the optimal debt and equilibrium real exchange rate in an environment where both the return on capital and the real rate of interest are stochastic variables. The theoretically derived equilibrium real exchange rate - the "natural real exchange rate" NATREX - is where the real exchange rate is heading. These benchmarks are applied to answer the following questions. * What is a theoretically based empirical measure of a "misaligned" exchange rate that increases the probability of a significant depreciation or a currency crisis? * What is a theoretically based empirical measure of an "excess" debt that increases the probability of or a debt crisis? * What is the interaction between an excess debt and a misaligned exchange rate? The theory is applied to evaluate the Euro exchange rate, the exchange rates of the transition economies, the sustainability of U.S. current account deficits, and derives warning signals of the Asian crises and debt crises in emerging markets.
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Bibliographic InfoThis book is provided by Oxford University Press in its series OUP Catalogue with number 9780199280575 and published in 2006.
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"A tale of two debt crises: a stochastic optimal control analysis,"
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- Karlhans Sauernheimer, 2011. "Greece: Bail-out Packages, Current Account and Foreign Debt," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 12(4), pages 37-43, December.
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- Jerome L. Stein, 2010. "A Critique of the Literature on the US Financial Debt Crisis," CESifo Working Paper Series 2924, CESifo Group Munich.
- Jerome L. Stein, 2009. "Application of Stochastic Optimal Control to Financial Market Debt Crises," CESifo Working Paper Series 2539, CESifo Group Munich.
- Federici, Daniela & Gandolfo, Giancarlo, 2012. "The Euro/Dollar exchange rate: Chaotic or non-chaotic? A continuous time model with heterogeneous beliefs," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 670-681.
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