Applications of the Stochastic Control Approach to the Egyptian Economy

This study outlines the “Stochastic Control Approach” technique and presents examples that illustrate the use of this method on two aspects of the Egyptian economy. Specifically, two empirical applications using data on Egypt are discussed in detail: optimal allocation of investment (Part I); and optimal level of reserves (Part II). In both applications, the estimated optimal levels are compared to the actual ones with useful insights for investment distribution for maximizing GDP growth, as well as, hedging sudden stops. In the process, we delineate some of the applications and highlight areas where further applications of the approach may be specifically fruitful.