Optimal Exchange Rates: A Stochastic Control Approach-Reference-Cited by-同舟云学术

Optimal Exchange Rates: A Stochastic Control Approach

Published:2022-12-31 Issue: Volume:19 Page:2027-2039
ISSN:2224-2899
Container-title:WSEAS TRANSACTIONS ON BUSINESS AND ECONOMICS
language:en
Short-container-title:

Author:

Abutaleb Ahmed S.¹,Papaioannou Michael G.²

Affiliation:

1. Currently with Cairo University, School of Engineering, Giza, Egypt, and previously with MIT Lincoln Lab, Lexington, Massachusetts, MA 02421, USA

2. Visiting Scholar, International Monetary Fund, 700 19th Street, NW, Washington, DC 20431, USA

Abstract

We present novel formulas for the determination of the optimal values of the exchange rate and the external (foreign currency) debt. A stochastic differential equation is developed that relates the net worth of an economy to both its exchange rate and level of external debt. Using the martingale optimality principle, the optimal values for the exchange rate and the external debt are derived. Applied to Egypt, we find that its actual nominal exchange rate has stayed above its optimal value since the early 1990s, except for two years, and that the actual external debt-to-net worth ratio is lower than the optimal one for most of the time. Since 2013 the actual external debt-to-net worth ratio is close to the risky levels of the optimal values.

Publisher

World Scientific and Engineering Academy and Society (WSEAS)

Subject

Economics and Econometrics,Finance,Business and International Management

Reference13 articles.

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