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Does Crown Financial Portfolio Composition Matter?

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Abstract

This paper considers Crown financial portfolio composition from a welfare perspective. It argues that a broad definition of the Crown’s portfolio is required for analysing the welfare implications of portfolio composition. In practice, this means incorporating the present discounted value of tax and expenditure flows as well as traditional measures of assets and liabilities. Financial portfolio composition affects welfare for a number of reasons: imperfect and incomplete markets; distortionary taxes; externalities; and agency problems. There is unlikely to be a single policy objective for choosing the preferred portfolio composition that integrates all of those factors. However, it is argued that the Crown should be risk averse and aim to eliminate all diversifiable risk in its portfolio. There is a reasonable case for adopting a low-risk Crown portfolio. Importantly, that does not necessarily require a low-volatility financial portfolio.

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File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2001/01-34/twp01-34.pdf
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Bibliographic Info

Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 01/34.

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Length: 22 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:nzt:nztwps:01/34

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Keywords: Public Finance; Portfolio Management;

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References

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  1. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  2. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
  3. Arthur Grimes, 2001. "Crown Financial Asset Management: Objectives and Practice," Treasury Working Paper Series 01/12, New Zealand Treasury.
  4. repec:fth:coluec:754 is not listed on IDEAS
  5. Alchian, Armen A & Woodward, Susan L, 1988. "The Firm is Dead; Long Live the Firm: A Review of Oliver E. Williamson's The Economic Institutions of Capitalism," Journal of Economic Literature, American Economic Association, vol. 26(1), pages 65-79, March.
  6. Nick Davis, . "Governance of Crown Financial Assets," Treasury Working Paper Series 98/02, New Zealand Treasury.
  7. Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858.
  8. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
  9. Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments ? Some Historical Evidence for the United States (Reprint 013)," Rodney L. White Center for Financial Research Working Papers 03-91, Wharton School Rodney L. White Center for Financial Research.
  10. Stefano Athanasoulis & Robert Shiller & Eric van Wincoop, 1999. "Macro markets and financial security," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 21-39.
  11. Chris Pinfield, . "Tax Smoothing and Expenditure Creep," Treasury Working Paper Series 98/09, New Zealand Treasury.
  12. Arthur Grimes, 1992. "Optimal public debt structure," Pacific Basin Working Paper Series 93-04, Federal Reserve Bank of San Francisco.
  13. Simon Bradbury & Jim Brumby & David Skilling, 1999. "Sovereign Net Worth: An Analytical Framework," Treasury Working Paper Series 99/03, New Zealand Treasury.
  14. Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments? Some Historical Evidence for the United States," Rodney L. White Center for Financial Research Working Papers 28-89, Wharton School Rodney L. White Center for Financial Research.
  15. Missale, Alessandro, 1997. " Managing the Public Debt: The Optimal Taxation Approach," Journal of Economic Surveys, Wiley Blackwell, vol. 11(3), pages 235-65, September.
  16. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
  17. Jeff Huther, 1999. "An Integrated Approach to Government Financial Policy," Treasury Working Paper Series 99/08, New Zealand Treasury.
  18. Jeff Huther, . "An Application of Portfolio Theory to New Zealand's Public Sector," Treasury Working Paper Series 98/04, New Zealand Treasury.
  19. Kerryn Fowlie, 1999. "Automatic Fiscal Stabilisers," Treasury Working Paper Series 99/07, New Zealand Treasury.
  20. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  21. Kerryn Fowlie & Julian Wright, 1997. "Optimal currency denomination of public debt in new zealand," New Zealand Economic Papers, Taylor & Francis Journals, vol. 31(2), pages 137-151.
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Cited by:
  1. Wilson Au-Yeung & Jason McDonald & Amanda Sayegh, 2006. "Australian Government Balance Sheet Management," NBER Working Papers 12302, National Bureau of Economic Research, Inc.
  2. Lassila , Jukka & Valkonen, Tarmo, 2008. "Population ageing and fiscal sustainability in Finland: a stochastic analysis," Research Discussion Papers 28/2008, Bank of Finland.

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