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An Integrated Approach to Government Financial Policy

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  • Jeff Huther
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    Abstract

    In this paper, I address three questions of government financial policy: how should a government’s aversion to financial risk be determined, when are new financial investments justified, and what is the optimal level of reserves in a flexible exchange rate regime. To answer these questions, I modify an integrated financial model developed by Froot and Stein (1998) to describe private sector financial policy. Financial risk aversion in this model is due to the potential of poor financial returns limiting an institution’s future investment opportunities. The potential for poor returns provides governments with incentives to hold reserves and limit new financial investments.

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    File URL: http://www.treasury.govt.nz/publications/research-policy/wp/1999/99-08/twp99-08.pdf
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    Bibliographic Info

    Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 99/08.

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    Length: 12 pages
    Date of creation: 1999
    Date of revision:
    Handle: RePEc:nzt:nztwps:99/08

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    Postal: New Zealand Treasury, PO Box 3724, Wellington, New Zealand
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    Web page: http://www.treasury.govt.nz
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    References

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    1. Buiter, Willem H, 2001. "Notes on 'A Code for Fiscal Stability.'," Oxford Economic Papers, Oxford University Press, vol. 53(1), pages 1-19, January.
    2. Froot, Kenneth A. & Stein, Jeremy C., 1998. "Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach," Journal of Financial Economics, Elsevier, vol. 47(1), pages 55-82, January.
    3. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
    4. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1992. "Risk Management: Coordinating Corporate Investment and Financing Policies," NBER Working Papers 4084, National Bureau of Economic Research, Inc.
    5. Silvia Ardagna & Francesco Caselli & Timothy Lane, 2004. "Fiscal discipline and the cost of public debt service: some estimates for OECD countries," Working Paper Series 411, European Central Bank.
    6. Louis Kaplow, 1995. "Taxation and Risk Taking: A General Equilibrium Perspective," NBER Working Papers 3709, National Bureau of Economic Research, Inc.
    7. DeMarzo, Peter M & Duffie, Darrell, 1995. "Corporate Incentives for Hedging and Hedge Accounting," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 743-71.
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    Cited by:
    1. Nick Davis, 2001. "Does Crown Financial Portfolio Composition Matter?," Treasury Working Paper Series 01/34, New Zealand Treasury.

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