Fiscal stimulus as an optimal control problem

DOI10.1016/J.SPA.2021.05.009zbMATH Open1492.91214arXiv1410.6084OpenAlexW3169797457MaRDI QIDQ2145819FDOQ2145819

Authors: Philip Ernst, Michael B. Imerman, Larry Shepp, Quan Zhou 

Publication date: 20 June 2022

Published in: Stochastic Processes and their Applications (Search for Journal in Brave)

Abstract: During the Great Recession, Democrats in the United States argued that government spending could be utilized to "grease the wheels" of the economy in order to create wealth and to increase employment; Republicans, on the other hand, contended that government spending is wasteful and discouraged investment, thereby increasing unemployment. Today, in 2020, we find ourselves in the midst of another crisis where government spending and fiscal stimulus is again being considered as a solution. In the present paper, we address this question by formulating an optimal control problem generalizing the model of Radner & Shepp (1996). The model allows for the company to borrow continuously from the government. We prove that there exists an optimal strategy; rigorous verification proofs for its optimality are provided. We proceed to prove that government loans increase the expected net value of a company. We also examine the consequences of different profit-taking behaviors among firms who receive fiscal stimulus.

Full work available at URL: https://arxiv.org/abs/1410.6084

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zbMATH Keywords

Hamilton-Jacobi-Bellman equationstochastic controldividend problemfiscal stimulusfinancial strategyRadner-Shepp model

Mathematics Subject Classification ID

Macroeconomic theory (monetary models, models of taxation) (91B64) Optimal stochastic control (93E20)

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