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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
    Phone: +64-4-472 2733
    Fax: +64-4-473 0982
    Web page: http://www.treasury.govt.nz
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    References

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    1. Buiter, Willem H, 1998. "Notes on 'A Code for Fiscal Stability'," CEPR Discussion Papers 1831, C.E.P.R. Discussion Papers.
    2. Kaplow, Louis, 1994. "Taxation and Risk Taking: A General Equilibrium Perspective," National Tax Journal, National Tax Association, vol. 47(4), pages 789-98, December.
    3. 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.
    4. Francesco Caselli, 1998. "Fiscal Discipline and the Cost of Public Debt Service," IMF Working Papers 98/55, International Monetary Fund.
    5. 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.
    6. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
    7. 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.
    8. Louis Kaplow, 1991. "Taxation and Risk Taking: A General Equilibrium Perspective," NBER Working Papers 3709, National Bureau of Economic Research, Inc.
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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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