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Stochastic Optimal Control Modeling of Debt Crises

Authors
Publisher
CESifo München
Publication Date
Keywords
  • Ddc:330
  • Stochastic Optimal Control
  • Debt
  • International Finance
  • Us Agricultural Crisis
  • Mean-Variance Analysis
  • Hamilton-Jacobi-Bellaman Equation
Disciplines
  • Computer Science
  • Mathematics

Abstract

What is an optimal or a sustainable external debt - for a country, region or sector? How should one monitor and evaluate debt to preclude a crisis? We use stochastic optimal control/dynamic programming to derive an optimal debt. The deviation of the actual from the optimal will serve as a Warning Signal of a crisis. There is a correspondence between Hamilton-Jacobi-Bellman equation of Dynamic Programming and the static Mean-Variance (M-V) analysis in finance. A graphic analysis of M-V is helpful to explain the implications of DP. An explicit example is the US Agricultural debt crisis.

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