Optimal Stabilization of Government Debt Policy

Abstract

The article discusses the model of stochastic dynamics of public debt and seniorage for highly asymmetric financial market of a transition economy. Macroeconomic policy of debt stabilization is considered as an option, the implementation of which takes place at the point of a reflective barrier. When it is reached, the amount of real money emission provides the optimal value of the expected present value of the debt. For the reflective barrier, the debt market is balanced, with the optimal option price positive and maximum for the government, and zero for private investors who fully pay for the policy of stabilizing public debt.