Government Debt Control: Optimal Currency Portfolio and Payments
Pages 1044 - 1057
Abstract
Motivated by empirical facts, we develop a theoretical model for optimal currency government debt portfolio and debt payments, which allows both government debt aversion and jumps in the exchange rates. We obtain first a realistic stochastic differential equation for public debt and then solve explicitly the optimal currency debt problem. We show that higher debt aversion and jumps in the exchange rates lead to a lower proportion of optimal debt in foreign currencies. Furthermore, we show that for a government with extreme debt aversion it is optimal not to issue debt in foreign currencies. To the best of our knowledge, this is the first theoretical model that provides a rigorous explanation of why developing countries have reduced consistently their proportion of foreign debt in their debt portfolios.
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Index Terms
- Government Debt Control: Optimal Currency Portfolio and Payments
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INFORMS
Linthicum, MD, United States
Publication History
Published: 01 October 2015
Accepted: 01 June 2015
Received: 01 September 2014
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