TY  - GEN
AB  - Consider the problem of a government that wants to control its debt-to-GDP
(gross domestic product) ratio, while taking into consideration the evolution of the inflation
rate of the country. The uncontrolled inflation rate follows an Ornstein-Uhlenbeck dynamics
and affects the growth rate of the debt ratio. The level of the latter can be reduced by the
government through fiscal interventions. 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 debt ratio. We model such problem as a two-dimensional singular stochastic
control problem over an infinite time-horizon. 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 the free-boundary of an associated fully two-dimensional optimal stopping problem, and
it is shown to be the unique solution of a nonlinear integral equation.
DA  - 2016
KW  - debt-to-GDP ratio
KW  - inflation rate
KW  - debt ceiling
KW  - singular stochastic control
KW  - optimal stopping
KW  - free-boundary
KW  - nonlinear integral equation
LA  - eng
PY  - 2016
SN  - 0931-6558
SP  - 33-
TI  - Controlling public debt without forgetting Inflation
UR  - https://nbn-resolving.org/urn:nbn:de:0070-pub-29047501
Y2  - 2024-11-22T12:06:57
ER  -