Fiscal stimulus as an optimal control problem

During the Great Recession, Democrats in the United States argued that government spending could be utilized to "grease the wheels" of the economy in order to create wealth and to increase employment; Republicans, on the other hand, contended that government spending is wasteful and discou...

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Bibliographic Details
Published in:arXiv.org 2021-04
Main Authors: Ernst, Philip A, Imerman, Michael B, Shepp, Larry, Zhou, Quan
Format: Article
Language:English
Subjects:
Economic conditions
Economics
Employment
Government spending
Martingales
Mathematical analysis
Optimal control
Optimization
Online Access:Get full text
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Summary:During the Great Recession, Democrats in the United States argued that government spending could be utilized to "grease the wheels" of the economy in order to create wealth and to increase employment; Republicans, on the other hand, contended that government spending is wasteful and discouraged investment, thereby increasing unemployment. Today, in 2020, we find ourselves in the midst of another crisis where government spending and fiscal stimulus is again being considered as a solution. In the present paper, we address this question by formulating an optimal control problem generalizing the model of Radner & Shepp (1996). The model allows for the company to borrow continuously from the government. We prove that there exists an optimal strategy; rigorous verification proofs for its optimality are provided. We proceed to prove that government loans increase the expected net value of a company. We also examine the consequences of different profit-taking behaviors among firms who receive fiscal stimulus.
ISSN:2331-8422