Stochastic Optimal Control, International Finance and Debt

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 744

Classification and Topics

• Classification: Wirtschaft
• Subject: stochastic optimal control ; foreign debt ; international finance ; vulnerability to external shocks ; sustainable current account deficits

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Fleming, Wendell ; Stein, Jerome L.
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2002

Further information

• Handle: http://hdl.handle.net/10419/75965
• Last update: 10.03.2025, 11:44 AM CET