# European sovereign debt control through reinforcement learning

## TL;DR

This paper explores how reinforcement learning can help manage European public debt during economic crises by coordinating fiscal and monetary policies.

## Contribution

The novel contribution is applying the Soft Actor-Critic reinforcement learning algorithm to optimize cooperative macroeconomic policy responses in the Eurozone.

## Key findings

- The Soft Actor-Critic algorithm performs comparably or better than NMPC in optimizing macroeconomic variables.
- Cooperative policy coordination is crucial for managing asymmetric economic shocks in the Eurozone.
- Reinforcement learning offers a promising approach for multi-objective macroeconomic optimization.

## Abstract

The resilience of economic systems depends mainly on coordination among key stakeholders during macroeconomic or external shocks, while a lack of coordination can lead to financial and economic crises. The paper builds on the experience of global and regional shocks, such as the Eurozone crises of 2009–2012 and the economic disruption resulting from COVID-19, starting in 2020. The paper demonstrates the importance of cooperation in monetary and fiscal policies during emergencies to address macroeconomic non-resilience, particularly focusing on public debt management. The Euro area is chosen as the sample for testing the models presented in the paper, given that its resilience is heavily dependent on cooperation among different actors within the region. The shocks affecting nations within the European Union are asymmetric, and the responses to these shocks require coordination, considering heterogeneous economic structures, levels of economic development, and policies. We develop a macroeconomic modeling framework to simulate fiscal and monetary policy interactions under a cooperative regime. The approach builds on earlier nonlinear control models and incorporates modern reinforcement learning techniques. Specifically, we implement the Soft Actor-Critic algorithm to optimize policy responses across key variables including inflation, interest rates, output gaps, public debt, and government net lending. We demonstrate that the Soft Actor-Critic algorithm provides comparable or, in some cases, better solutions to multi-objective macroeconomic optimization problems, in comparison to Nonlinear Model Predictive Control (NMPC) algorithm.