Chapter

Stochastic intertemporal optimization: Long-term debt continuous time

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/10.1093/0199280576.003.0003
 							Stochastic intertemporal optimization: Long-term debt continuous time

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This chapter answers the following technical questions: In a stochastic environment, where the return on capital and the interest rate are stochastic, what is an optimal (1) long-term debt, (2) expected current account, (3) consumption, and (4) expected growth rate. The mathematical techniques necessary to answer these questions, concerning intertemporal optimization in continuous time over an infinite horizon, involve dynamic programming. A mean-variance interpretation is given for the dynamic programming solution.

Keywords: intertemporal optimization; dynamic programming solution; optimal debt; consumption; endogenous growth rate; current account; mean-variance analysis

Chapter.  12442 words.  Illustrated.

Subjects: Financial Markets

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