The stochastic simulation model suggested by Bolder (2003) for the analysis of the federal government's debt-management strategy provides a wide variety of useful information. It does not, however, assist in determining an optimal debt-management strategy for the government in its current form. Including optimization in the debt-strategy model would be useful, since it could substantially broaden the range of policy questions that can be addressed. Finding such an optimal strategy is nonetheless complicated by two challenges. First, performing optimization with traditional techniques in a simulation setting is computationally intractable. Second, it is necessary to define precisely what one means by an "optimal" debt strategy. The authors detail a possible approach for addressing these two challenges. They address the first challenge by approximating the numerically computed objective function using a function-approximation technique. They consider the use of ordinary least squares, kernel regression, multivariate adaptive regression splines, and projection-pursuit regressions as approximation algorithms. The second challenge is addressed by proposing a wide range of possible government objective functions and examining them in the context of an illustrative example. The authors' view is that the approach permits debt and fiscal managers to address a number of policy questions that could not be fully addressed with the current stochastic simulation engine.
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Paper provided by Bank of Canada in its series Working Papers with number
07-13.
Find related papers by JEL classification: C0 - Mathematical and Quantitative Methods - - General C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis C65 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Miscellaneous Mathematical Tools E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook G1 - Financial Economics - - General Financial Markets H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management
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