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Three Policy Options for Crown Financial Policy

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  • Eric Hansen

    ()
    (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 potentially significant implications for New Zealand economic welfare. Previous work has identified that four objectives should form the main basis for assessing alternative Crown financial policies. Three of the objectives relate to minimising distortionary taxation, time-inconsistency of policy and agency cost of government. However, the absolute and relative importance of these objectives is subject to considerable uncertainty. The fourth objective, which is to avoid exacerbating any existing inefficiencies or creating any new ones, is considered part of the baseline common to all policies. In this paper a qualitative analysis is conducted to select three high-level policies for detailed quantitative analysis in future papers. The three policies vary in terms of level of risk: • A low risk policy that places emphasis on time-consistency and agency cost issues while down-weighting the significance of distortionary taxation; • A medium risk policy that applies a balanced weighting to the three issues; and • A high risk policy that places emphasis on distortionary taxation while downweighting time-consistency and agency cost. Detailed policy targets are specified for the candidate policies in terms of Crown net worth, overall risk/return properties of the Crown balance sheet, and the level and structure of financial assets and public debt. The policy targets under the status quo are presented for comparative purposes.

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    Bibliographic Info

    Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 03/30.

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    Length: 56
    Date of creation: Dec 2003
    Date of revision:
    Handle: RePEc:nzt:nztwps:03/30

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    Postal: New Zealand Treasury, PO Box 3724, Wellington, New Zealand
    Phone: +64-4-472 2733
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    Web page: http://www.treasury.govt.nz
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    Related research

    Keywords: Agency cost of government; Bayesian decision theory; comparative institutional method; Crown balance sheet; public debt management; distortionary taxation; time-inconsistency of policy;

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    1. Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858, September.
    2. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
    3. 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.
    4. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal Fiscal Policy in a Business Cycle Model," NBER Working Papers 4490, National Bureau of Economic Research, Inc.
    5. Christodoulakis, Nicos & Kemball-Cook, David & Levine, Paul, 1993. "The Design of Economic Policy under Model Uncertainty," Computational Economics, Society for Computational Economics, vol. 6(3-4), pages 219-40, November.
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