Title: Anatomy of the Eurozone crisis: A survival approach
Authors: Haluk Yener - Istanbul Bilgi University (Turkey) [presenting]
Abstract: Two problems related to growth and survival probability maximization of an economy are solved. We assume that the problems are subject to a stochastic net worth model and apply the techniques of stochastic optimal control theory in order to find our results. From the results, we first construct a normative model with a dynamic threshold that designates the borrowing potential of an economy and a parameter that is used to see when borrowing more than the potential poses threat to an economy. In essence, we build a model that spots the non-resilient periods of an economy and introduce an indicator that demonstrates the level of non-resilience given the heterogeneous effect of crisis in Eurozone. Secondly, we aim to understand why economies exceed their borrowing potential by building an analytic relationship between the leverage strategy of an economy and its economic condition. Given this, we then construct a vector autoregressive (VAR-) model to show why certain economies borrow more than they should and eventually become non-resilient.