Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/75965 
Year of Publication: 
2002
Series/Report no.: 
CESifo Working Paper No. 744
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
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.
Subjects: 
stochastic optimal control
foreign debt
international finance
vulnerability to external shocks
sustainable current account deficits
Document Type: 
Working Paper
Appears in Collections:

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.