Stochastic Optimal Control, International Finance and Debt
We use stochastic optimal control-dynamic programming (DP) to derive the optimal foreign debt/net worth, consumption/net worth, current account/net worth, and endogenous growth rate in an open economy. Unlike the literature that uses an Intertemporal Budget Constraint (IBC) or the Maximum Principle, the DP approach does not require perfect foresight or certainty equivalence. Errors of measurement and the effects of unanticipated shocks are corrected in an optimal manner. We contrast the DP and IBC approaches, show how the results of the dynamic programming approach can be interpreted in a traditional simple mean-variance/Tobin-Markowitz context, and explain why our results are generalizations of the Merton model.
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| Date of creation: | 2002 |
| Date of revision: | |
| Handle: | RePEc:ces:ceswps:_744 |
| Contact details of provider: | Postal: Phone: +49 (89) 9224-0 Fax: +49 (89) 985369 Web page: http://www.cesifo.de Email: More information through EDIRC
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- Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867-1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, May.
- Infante, Ettore F & Stein, Jerome L, 1973. "Optimal Growth with Robust Feedback Control," Review of Economic Studies, Wiley Blackwell, vol. 40(1), pages 47-60, January.
- Stein, Jerome L & Paladino, Giovanna, 2001.
"Country Default Risk: An Empirical Assessment,"
Australian Economic Papers,
Wiley Blackwell, vol. 40(4), pages 417-36, December.
- Jerome L. Stein & Giovanna Paladino, 2001. "Country Default Risk: An Empirical Assessment," Working Papers 2001-08, Brown University, Department of Economics.
- Jerome L. Stein & Giovanna Paladino, 2001. "Country Default Risk: An Empirical Assessment," CESifo Working Paper Series 469, CESifo Group Munich.
- Gandolfo, Giancarlo & Goldberg, Michael D., 2005. "International Finance And Open-Economy Macroeconomics," Macroeconomic Dynamics, Cambridge University Press, vol. 9(02), pages 263-266, April.
- Stein, Jerome L. & Paladino, Giovanna, 1997. "Recent developments in international finance: A guide to research," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1685-1720, December.
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