Optimal budget and seigniorage targeting policy in a transition economy

Targeting policy is treated as a marginal capping of seigniorage and government expenditures, respectively. Appropriate policies of stabilization might be performed by the government rather independently due to existence of a distorted and asymmetric financial market in a transition economy. Feasible strategies are represented as solutions to the Bellman equation in the optimal stopping problem for stochastic processes of budget expenditures and government borrowing on the open market. Respective options to stop spending and borrowing prescribe the optimal policy for budget expenditures as well as for seigniorage targeting. Implementation of such a policy is, in essence, an imposition of the call provisions on the government debt, the optimal value of which is equal to the value of the opportunity to borrow at the optimal point.