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Improving the Management of the Crown’s Exposure to Risk

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  • Timothy Irwin
  • Oscar Parkyn

    ()
    (The Treasury)

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    Abstract

    The paper discusses the management of the New Zealand Crown’s exposure to financial risk. It argues that the Crown’s aggregate exposure to risk can be effectively managed only centrally, and that, despite the difficulties of measuring risk and specifying an appropriate objective, the government should do more to measure, monitor, and control the Crown’s aggregate exposure to risk. The paper goes on to present a new model for quantifying the Crown’s exposure to risk, which integrates analysis of the government’s accounting assets and liabilities with analysis of projected tax revenue and government spending. Among other results, the model suggests that the annual volatility (standard deviation) of the Crown’s comprehensive balance sheet is at present approximately $30 billion.

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    File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2009/09-06/twp09-06.pdf
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    Bibliographic Info

    Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 09/06.

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    Length: 42
    Date of creation: Dec 2009
    Date of revision:
    Handle: RePEc:nzt:nztwps:09/06

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    Postal: New Zealand Treasury, PO Box 3724, Wellington, New Zealand
    Phone: +64-4-472 2733
    Fax: +64-4-473 0982
    Web page: http://www.treasury.govt.nz
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    Related research

    Keywords: Risk management; Crown balance sheet;

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    References

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    1. Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics 9907006, EconWPA.
    2. 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.
    3. Robert C. Merton & Zvi Bodie, 1992. "On the Management of Financial Guarantees," Financial Management, Financial Management Association, vol. 21(4), Winter.
    4. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
    5. Rabin, Matthew, 2000. "Diminishing Marginal Utility of Wealth Cannot Explain Risk Aversion," Department of Economics, Working Paper Series qt61d7b4pg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    6. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
    7. Buiter, Willem H, 1984. "Measuring Aspects of Fiscal and Financial Policy," CEPR Discussion Papers 13, C.E.P.R. Discussion Papers.
    8. Michael Graff, 2004. "Estimates of the output gap in real time: how well have we been doing?," Reserve Bank of New Zealand Discussion Paper Series DP 2004/04, Reserve Bank of New Zealand.
    9. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
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