Determination of optimal public debt ceiling for Kenya using stochastic control

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 developed 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 formula proposed by (Cadenillas and Aguilar, 2015) to find out the optimal public debt ceiling for Kenya. 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.