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Three Policy Options for Crown Financial Policy

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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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  • Eric Hansen, 2003. "Three Policy Options for Crown Financial Policy," Treasury Working Paper Series 03/30, New Zealand Treasury.
  • Handle: RePEc:nzt:nztwps:03/30
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    File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2003/03-30/twp03-30.pdf
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    1. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994. "Optimal Fiscal Policy in a Business Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 617-652, August.
    2. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-1230, December.
    3. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    4. Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858.
    5. Christodoulakis, Nicos & Kemball-Cook, David & Levine, Paul, 1993. "The Design of Economic Policy under Model Uncertainty," Computational Economics, Springer;Society for Computational Economics, vol. 6(3-4), pages 219-240, November.
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    More about this item

    Keywords

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

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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