Stochastic Optimal Control Modeling of Debt Crises
AbstractWhat is an optimal or a sustainable external debt - for a country, region or sector? How should one monitor and evaluate debt to preclude a crisis? We use stochastic optimal control/dynamic programming to derive an optimal debt. The deviation of the actual from the optimal will serve as a Warning Signal of a crisis. There is a correspondence between Hamilton-Jacobi-Bellman equation of Dynamic Programming and the static Mean-Variance (M-V) analysis in finance. A graphic analysis of M-V is helpful to explain the implications of DP. An explicit example is the US Agricultural debt crisis.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1043.
Date of creation: 2003
Date of revision:
stochastic optimal control; debt; international finance; US agricultural crisis; Mean-Variance analysis; Hamilton-Jacobi-Bellaman equation;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-02 (All new papers)
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- Jerome L. Stein & Giovanna Paladino, 2001.
"Country Default Risk: An Empirical Assessment,"
2001-08, Brown University, Department of Economics.
- Robison, Lindon J. & Barry, Peter J. & Burghardt, William G., 1987. "Borrowing Behavior Under Financial Stress By The Proprietary Firm: A Theoretical Analysis," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 12(02), December.
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