On the Optimal Management of Public Debt: a Singular Stochastic Control Problem

DOI10.1137/16M1084870zbMATH Open1396.91521arXiv1607.04153MaRDI QIDQ3176296FDOQ3176296

Authors: Giorgio Ferrari 

Publication date: 19 July 2018

Published in: SIAM Journal on Control and Optimization (Search for Journal in Brave)

Abstract: Consider the problem of a government that wants to reduce the debt-to-GDP (gross domestic product) ratio of a country. The government aims at choosing a debt reduction policy which minimises the total expected cost of having debt, plus the total expected cost of interventions on the debt ratio. We model this problem as a singular stochastic control problem over an infinite time-horizon. In a general not necessarily Markovian framework, we first show by probabilistic arguments that the optimal debt reduction policy can be expressed in terms of the optimal stopping rule of an auxiliary optimal stopping problem. We then exploit such link to characterise the optimal control in a two-dimensional Markovian setting in which the state variables are the level of the debt-to-GDP ratio and the current inflation rate of the country. The latter follows uncontrolled Ornstein-Uhlenbeck dynamics and affects the growth rate of the debt ratio. We show that it is optimal for the government to adopt a policy that keeps the debt-to-GDP ratio under an inflation-dependent ceiling. This curve is given in terms of the solution of a nonlinear integral equation arising in the study of a fully two-dimensional optimal stopping problem.

Full work available at URL: https://arxiv.org/abs/1607.04153

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zbMATH Keywords

optimal stoppingsingular stochastic controldebt-to-GDP ratioinflation ratio

Mathematics Subject Classification ID

Macroeconomic theory (monetary models, models of taxation) (91B64) Statistical methods; economic indices and measures (91B82) Stopping times; optimal stopping problems; gambling theory (60G40) Optimal stochastic control (93E20)

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Cited In (13)

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• Public debt dynamics under ambiguity by means of iterated function systems on density functions
• A stochastic control approach to public debt management
• Applications of stochastic optimal control/dynamic programming to international finance and debt crises
• Optimal reduction of public debt under partial observation of the economic growth
• A stochastic non-zero-sum game of controlling the debt-to-GDP ratio
• Intervene in advance or passively? Analysis and application on congestion control of smart grid
• Debt redemption fund and fiscal incentives
• Taming the spread of an epidemic by lockdown policies
• Explicit formula for the optimal government debt ceiling
• A multi-objective multi-period stochastic programming model for public debt management

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