Chapter

United States current account deficits: A stochastic optimal control analysis<sup>1</sup>

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/10.1093/0199280576.003.0009
 							United States current account deficits: A stochastic optimal control analysis1

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For nearly a quarter of a century, the US has persistently run significant current account deficits that transformed it from the world’s largest net creditor to its largest debtor. The stochastic optimal control/dynamic programming approach provides a framework to derive the optimal debt ratio, based upon both objective variables and preferences. The following set of questions are answered: What is a sustainable ratio of external debt/GDP? What are the consequences of an “excessive” debt? By how much does the dollar need to decline in order to achieve a sustainable current account position for the US and rest of world? The deviation of the actual debt ratio from the derived optimum increases the vulnerability of the economy to external shocks.

Keywords: United States; current account deficits; external debt; external shocks; real exchange rate; stochastic optimal control; dynamic programming

Chapter.  15039 words.  Illustrated.

Subjects: Financial Markets

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