Optimal Debt and Equilibrium Exchange Rates in a Stochastic Environment: an Overview
The focus is upon equilibrium real exchange rates, optimal external debt and their interaction, in a world where both the return on investment and the real rate of interest are stochastic variables. These theoretically based measures are applied empirically to answer the following questions: What is a theoretically based empirical measure of an "excess debt" that increases the probability of a debt crisis? What is a theoretically based empirical measure of a "misaligned" exchange rate that increases the probability of a currency/balance of payments crises? Two theoretical tools are used to derive Early Warning Signals. One is the NATREX model to estimate the equilibrium real exchange rate. The second is stochastic optimal control/dynamic programming to derive the optimal debt and endogenous growth rate. Examples are given of these applications.
|Date of creation:||2004|
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- Fischer, Christoph, 2002.
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BOFIT Discussion Papers
8/2002, Bank of Finland, Institute for Economies in Transition.
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Elsevier, vol. 28(5), pages 979-996, May.
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- Romain Duval, 2002. "What Do We Know About Long-run Equilibrium Real Exchange Rates? PPPs vs Macroeconomic Approaches," Australian Economic Papers, Wiley Blackwell, vol. 41(4), pages 382-403, December.
- Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
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