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Optimal Debt And Endogenous Growth In Models Of International Finance

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  • JEROME L. STEIN

Abstract

The International Monetary Fund, the World Bank and the bond rating agencies did not anticipate the crises in Asia 1997–98 and in Argentina 2001. With this statement in mind, we consider some multi‐stage inter‐temporal stochastic optimisation models in international finance that imply theoretically founded and empirically measurable Early Warning Signals. The mathematical technique is dynamic programming/stochastic optimal control (DP/SOC). The variables of interest are the optimal foreign debt, consumption, capital and the growth rate of GDP. They are used as benchmarks of economic performance. By comparing the actual debt to the optimal debt we derive a measure of the sustainability of the debt and vulnerability to default problems. The two sources of uncertainty – the productivity of capital and the real interest rate on the foreign debt – are modeled as stochastic processes. Specific applications of the DP/SOC techniques are given for country defaults in Asia and Latin America, and the US current account deficits.

Suggested Citation

  • Jerome L. Stein, 2005. "Optimal Debt And Endogenous Growth In Models Of International Finance," Australian Economic Papers, Wiley Blackwell, vol. 44(4), pages 389-413, December.
    • Handle: RePEc:bla:ausecp:v:44:y:2005:i:4:p:389-413
    DOI: 10.1111/j.1467-8454.2005.00268.x
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    1. Stein, Jerome L., 2006. "Stochastic Optimal Control, International Finance, and Debt Crises," OUP Catalogue, Oxford University Press, number 9780199280575.
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    Cited by:

    1. Jerome L. Stein, 2010. "Greenspan's Retrospective of Financial Crisis and Stochastic Optimal Control," European Financial Management, European Financial Management Association, vol. 16(5), pages 858-871, November.
    2. Haluk Yener & Thanasis Stengos & M. Ege Yazgan, 2015. "Survival Maximizing Leverage of an Economy: The Case of Greece," Working Papers 1503, University of Guelph, Department of Economics and Finance.
    3. Stein, Jerome L., 2011. "The crisis, Fed, Quants and stochastic optimal control," Economic Modelling, Elsevier, vol. 28(1-2), pages 272-280, January.
    4. Basil Dalamagas & Stefanos Tantos, 2017. "Optimal Sovereign Debt for an Overdebted Country," Australian Economic Papers, Wiley Blackwell, vol. 56(2), pages 95-118, June.
    5. Haluk Yener & Thanasis Stengos & M. Ege Yazgan, 2017. "Analysis of the seeds of the debt crisis in Europe," The European Journal of Finance, Taylor & Francis Journals, vol. 23(15), pages 1589-1610, December.
    6. Stein, Jerome L., 2010. "A tale of two debt crises: a stochastic optimal control analysis," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 4, pages 1-24.
    7. Stein, Jerome L., 2007. "United States current account deficits: A stochastic optimal control analysis," Journal of Banking & Finance, Elsevier, vol. 31(5), pages 1321-1350, May.
    8. Jerome L. Stein, 2009. "Application of Stochastic Optimal Control to Financial Market Debt Crises," CESifo Working Paper Series 2539, CESifo.
    9. Creina Day & Garth Day, 2010. "Taxes, Growth And The Current Account Tick‐Curve Effect," Australian Economic Papers, Wiley Blackwell, vol. 49(1), pages 13-27, March.
    10. Daping Zhao & Sajid Anwar & W. Robert J. Alexander, 2022. "Sources of economic slowdown: A simultaneous equations approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2549-2565, April.
    11. Cheng, Mei-luan & Gloy, Brent A., 2008. "The Paradox of Risk Balancing: Do Risk-reducing Policies Lead to More Risk for Farmers?," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6546, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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