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Determination of Optimal Public Debt Ceiling for Kenya Using Stochastic Control

Received: 13 May 2018     Accepted: 19 June 2018     Published: 23 July 2018
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Abstract

Public debt is a key economic variable. It is the totality of public and publicly guaranteed debt owed by any level of government to either citizens or foreigners or both. Due to recent debt crises in countries such as Portugal, Italy, Ireland, Greece and Spain, debt control has become a key important fiscal policy of every government. In this study, we applied a Public debt ceiling explicit formula to find out the optimal public debt ceiling for Kenya [3]. We made modification to subjective variables in the explicit formula and used the formula to find the optimal public debt ceiling for Kenya. We illustrate that it is prudent for that government to use a fiscal policy that maintains the debt ratio under an optimal debt ceiling.

Published in Science Journal of Applied Mathematics and Statistics (Volume 6, Issue 3)
DOI 10.11648/j.sjams.20180603.14
Page(s) 90-98
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2018. Published by Science Publishing Group

Keywords

Stochastic Optimal Control, Public Debt, Debt Ceiling, Hamilton-Jacobi-Bellman Equation, Value Function, Control Process

References
[1] Soner, Stochastic Optimal Control in Finance., Oxford, 2004.
[2] K. Ross, Stochastic Control in Continuous time, Stanford University.
[3] Cadenillas and Aguilar, "Explicit formula for the optimal government debt ceiling," Annals of Operation Research, vol. 247, no. 2, pp. 415-449., 2016.
[4] N. Treasury, "Annual Public Debt Management Report, Kenya," Nairobi, 2016.
[5] Wyplosz, "Fiscal policy: institutions versus rules.," National Institute Economic Review 191 6478, 2005.
[6] Merton, "Optimum Consumption and Portfolio Rules," JOURNAL OF ECONOMIC THEORY, vol. 3, pp. 373-413, 1971.
[7] Z. Wei-han, Analysis of Optimal Debt Ratio in A Markov Regime-Switching Model, 2014.
[8] S. Pontryagin, "optimal processes of regulation, UspekhiMat.," English transl. in American Mathematical Society Transl, vol. 1, no. 85, p. 320, 1959.
[9] R. Bellman, Dynamic Programming, Princeton Univ., Press, Princeton, New Jersey., 2010.
[10] Yong et al, Stochastic Controls: Hamiltonian Systems and HJB Equations, Springer, New York., 1999.
[11] Ferrari, "On the Optimal Management of Public Debt: a Singular Stochastic Control Problem, to appear in SIAM," 2016. [Online]. Available: https://arxiv.org/abs/1607. 04153. [Accessed 02 04 2018].
[12] Ostry et al, "IMF Staff Discussion note, When Should Public Debt Be Reduced?" IMF, 2015.
[13] Stein, Stochastic optimal control, international finance and debt crises, Oxford University Press., 2012.
[14] Barro, "Notes on optimal debt management.," Journal of Applied Economics, vol. 2, no. 2, p. 281289., 1999.
[15] Barro, "(1974), Are government bonds net wealth?" The Journal of Political, 1974.
[16] R. Bulow, "Sovereign debt: is to forgive to forget?" The American Economic Review, vol. 79, no. 1, p. 4350., 1989.
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  • APA Style

    Millicent Kithinji, Lucy Muthoni. (2018). Determination of Optimal Public Debt Ceiling for Kenya Using Stochastic Control. Science Journal of Applied Mathematics and Statistics, 6(3), 90-98. https://doi.org/10.11648/j.sjams.20180603.14

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    ACS Style

    Millicent Kithinji; Lucy Muthoni. Determination of Optimal Public Debt Ceiling for Kenya Using Stochastic Control. Sci. J. Appl. Math. Stat. 2018, 6(3), 90-98. doi: 10.11648/j.sjams.20180603.14

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    AMA Style

    Millicent Kithinji, Lucy Muthoni. Determination of Optimal Public Debt Ceiling for Kenya Using Stochastic Control. Sci J Appl Math Stat. 2018;6(3):90-98. doi: 10.11648/j.sjams.20180603.14

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  • @article{10.11648/j.sjams.20180603.14,
      author = {Millicent Kithinji and Lucy Muthoni},
      title = {Determination of Optimal Public Debt Ceiling for Kenya Using Stochastic Control},
      journal = {Science Journal of Applied Mathematics and Statistics},
      volume = {6},
      number = {3},
      pages = {90-98},
      doi = {10.11648/j.sjams.20180603.14},
      url = {https://doi.org/10.11648/j.sjams.20180603.14},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.sjams.20180603.14},
      abstract = {Public debt is a key economic variable. It is the totality of public and publicly guaranteed debt owed by any level of government to either citizens or foreigners or both. Due to recent debt crises in countries such as Portugal, Italy, Ireland, Greece and Spain, debt control has become a key important fiscal policy of every government. In this study, we applied a Public debt ceiling explicit formula to find out the optimal public debt ceiling for Kenya [3]. We made modification to subjective variables in the explicit formula and used the formula to find the optimal public debt ceiling for Kenya. We illustrate that it is prudent for that government to use a fiscal policy that maintains the debt ratio under an optimal debt ceiling.},
     year = {2018}
    }
    

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    AB  - Public debt is a key economic variable. It is the totality of public and publicly guaranteed debt owed by any level of government to either citizens or foreigners or both. Due to recent debt crises in countries such as Portugal, Italy, Ireland, Greece and Spain, debt control has become a key important fiscal policy of every government. In this study, we applied a Public debt ceiling explicit formula to find out the optimal public debt ceiling for Kenya [3]. We made modification to subjective variables in the explicit formula and used the formula to find the optimal public debt ceiling for Kenya. We illustrate that it is prudent for that government to use a fiscal policy that maintains the debt ratio under an optimal debt ceiling.
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Author Information
  • Strathmore Institute of Mathematical Sciences, Strathmore University, Nairobi, Kenya

  • Strathmore Institute of Mathematical Sciences, Strathmore University, Nairobi, Kenya

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