United States Current Account Deficits: A Stochastic Optimal Control Analysis
AbstractThe "Pessimists" and the "Optimists" disagree whether the US external deficits and the associated buildup of US net foreign liabilities are problems that require urgent attention. A warning signal should be that the debt ratio deviates significantly from the optimal ratio. The optimal debt ratio or debt burden should take into account the vulnerability of consumption to shocks from the productivity of capital, the interest rate and exchange rate. The optimal debt ratio is derived from inter-temporal optimization using Dynamic Programming, because the shocks are unpredictable, and it is essential to have a feedback control mechanism. The optimal ratio depends upon the risk adjusted net return and risk aversion both at home and abroad. On the basis of alternative estimates, we conclude that the Pessimists' fears are justified on the basis of trends. The trend of the actual debt ratio is higher than that of the optimal ratio. The Optimists are correct that the current debt ratio is not a menace, because the current level of the debt ratio is not above the corresponding level of the optimum ratio.
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.
Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1805.
Date of creation: 2006
Date of revision:
U.S. current account deficits; external debt; stochastic optimal control; dynamic programming; inter-temporal optimization;
Other versions of this item:
- 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.
- NEP-ALL-2006-10-07 (All new papers)
- NEP-CBA-2006-10-07 (Central Banking)
- NEP-FMK-2006-10-07 (Financial Markets)
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.:
- Eckhard Platen, 2005.
"On The Role Of The Growth Optimal Portfolio In Finance,"
Australian Economic Papers,
Wiley Blackwell, vol. 44(4), pages 365-388, December.
- Eckhard Platen, 2005. "On the Role of the Growth Optimal Portfolio in Finance," Research Paper Series 144, Quantitative Finance Research Centre, University of Technology, Sydney.
- Wendell H. Fleming, 2005. "Optimal Investment Models With Minimum Consumption Criteria," Australian Economic Papers, Wiley Blackwell, vol. 44(4), pages 307-321, December.
- Jerome L. Stein, 2005. "Optimal Debt And Endogenous Growth In Models Of International Finance," Australian Economic Papers, Wiley Blackwell, vol. 44(4), pages 389-413, December.
- Edwin M. Truman, 2005. "Postponing Global Adjustment: An Analysis of the Pending Adjustment of Global Imbalances," Working Paper Series WP05-6, Peterson Institute for International Economics.
- Ben S. Bernanke, 2005. "The global saving glut and the U.S. current account deficit," Speech 77, Board of Governors of the Federal Reserve System (U.S.).
- Fleming, Wendell H. & Stein, Jerome L., 2004.
"Stochastic optimal control, international finance and debt,"
Journal of Banking & Finance,
Elsevier, vol. 28(5), pages 979-996, May.
- Wendell Fleming & Jerome L. Stein, 2002. "Stochastic Optimal Control, International Finance and Debt," CESifo Working Paper Series 744, CESifo Group Munich.
- Stein, Jerome L., 2006. "Stochastic Optimal Control, International Finance, and Debt Crises," OUP Catalogue, Oxford University Press, number 9780199280575.
- Richard N. Cooper, 2005. "Living with Global Imbalances: A Contrarian View," Policy Briefs PB05-03, Peterson Institute for International Economics.
- repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
- Catherine L. Mann, 1999. "Is the U.S. Trade Deficit Sustainable?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 47.
- Hiraguchi, Ryoji, 2009. "Non-concavity problems in the dynamic macroeconomic models: A note," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 568-572, March.
- 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., 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.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).
If references are entirely missing, you can add them using this form.