Chapter

Optimal debt and equilibrium exchange rates in a stochastic environment: an overview

Jerome L. Stein

in Stochastic Optimal Control, International Finance, and Debt Crises

Published in print April 2006 | ISBN: 9780199280575
Published online May 2006 | e-ISBN: 9780191603501 | DOI: http://dx.doi.org/10.1093/0199280576.003.0001
 							Optimal debt and equilibrium exchange rates in a stochastic environment: an overview

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This overview chapter explains the relevance and the contributions of this book to economic theory and policy. The economic theory and mathematics developed in chapters 2 and 3 derive benchmarks for the optimal debt in an environment where both the return on capital and the real rate of interest are stochastic variables. The equilibrium real exchange rate, the subject of chapter 4, is where the real exchange rate is heading. These benchmarks are applied in chapters 5-9 to the euro, the real exchange rate of the transition economies in Eastern Europe, default risks in emerging market countries, the Asian crises, and the United States current account deficits.

Keywords: optimal debt; real exchange rate; transition economies; current account deficits; return on capital; currency crises; debt crises

Chapter.  16595 words.  Illustrated.

Subjects: Financial Markets

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