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Title:Optimal debt and equilibrium exchange rates in a stochastic environment : an overview PDF Logo
Authors:Stein, Jerome L.
Issue Date:2004
Series/Report no.:CESifo working papers 1363
Abstract: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.
Subjects:stochastic optimal control
foreign debt
NATREX
vulnerability to external shocks
sustainable current account
warning signals of debt crisis
JEL:F4
F3
D9
C61
D81
F34
F31
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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