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Objectives, Targets and Instruments for Crown Financial Policy

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  • Eric Hansen

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    (The Treasury)

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    Abstract

    Crown financial policy is concerned with how the government manages the Crown’s assets and liabilities. The recently established New Zealand Superannuation Fund, which is projected to grow to around 45% of GDP over the next few decades, highlights that Crown financial policy is likely to become an important economic policy tool with potential to have a significant impact on New Zealand economic welfare. The policy framework of objectives, targets and instruments is adopted as a basis for organising the theory literature relating to Crown financial policy. Applying this framework, seven distinct policy objectives are identified as potentially relevant to the future development of policy. Applying qualitative assessment criteria, it is concluded that four of the seven objectives should be the main factors that inform the design of alternative policy options. The four objectives relate to minimising distortionary taxation, time-consistency of policy, agency costs of government, and downside efficiency risks. The three objectives considered less relevant relate to policy neutrality, missing markets and risk management services. The four main objectives imply a range of targets could be adopted for the Crown balance sheet, some of which would be conflicting. The objectives of minimising distortionary taxation suggests targeting the minimum risk portfolio by building up financial assets and net worth whereas the objective of minimising the agency cost of government suggests placing an upper bound on government operating surpluses and limiting the build up of financial assets. Time-consistency and agency cost objectives tend to conflict because the former suggests the level of debt should be kept low whereas the latter suggests high debt levels.

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    File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2003/03-21/twp03-21.pdf
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    Bibliographic Info

    Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 03/21.

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    Length: 45
    Date of creation: Sep 2003
    Date of revision:
    Handle: RePEc:nzt:nztwps:03/21

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    Related research

    Keywords: Agency cost; bounded rationality; Crown balance sheet; distortionary taxation; imperfect and incomplete capital markets; public debt management; Ricardian equivalence; time-inconsistency;

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    1. Barro, Robert J & Sala-i-Martin, Xavier, 1992. "Public Finance in Models of Economic Growth," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 645-61, October.
    2. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
    3. Kenneth A. Froot & Jeremy C. Stein, 1996. "Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach," Center for Financial Institutions Working Papers 96-28, Wharton School Center for Financial Institutions, University of Pennsylvania.
    4. Holmstrom, B & Tirole, J, 1996. "Private and Public Supply of Liquidity," Working papers 96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Alberto Alesina & Roberto Perotti, 1994. "The Political Economy of Budget Deficits," NBER Working Papers 4637, National Bureau of Economic Research, Inc.
    6. Missale, Alessandro, 1997. " Managing the Public Debt: The Optimal Taxation Approach," Journal of Economic Surveys, Wiley Blackwell, vol. 11(3), pages 235-65, September.
    7. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    8. George-Marios Angeletos, 2002. "Fiscal Policy With Noncontingent Debt And The Optimal Maturity Structure," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1105-1131, August.
    9. Arthur Grimes, 2001. "Crown Financial Asset Management: Objectives and Practice," Treasury Working Paper Series 01/12, New Zealand Treasury.
    10. Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858.
    11. Peled, Dan, 1985. "Stochastic inflation and government provision of indexed bonds," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 291-308, May.
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