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Improving the Management of the Crown’s Exposure to Risk

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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.

Suggested Citation

  • Timothy Irwin & Oscar Parkyn, 2009. "Improving the Management of the Crown’s Exposure to Risk," Treasury Working Paper Series 09/06, New Zealand Treasury.
  • Handle: RePEc:nzt:nztwps:09/06
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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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    References listed on IDEAS

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    1. 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.
    2. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
    3. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    4. Matthew Rabin., 2000. "Diminishing Marginal Utility of Wealth Cannot Explain Risk Aversion," Economics Working Papers E00-287, University of California at Berkeley.
    5. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-1230, December.
    6. Willem H. Buiter, 1984. "Measuring Aspects of Fiscal and Financial Policy," NBER Working Papers 1332, National Bureau of Economic Research, Inc.
    7. Robert C. Merton & Zvi Bodie, 1992. "On the Management of Financial Guarantees," Financial Management, Financial Management Association, vol. 21(4), Winter.
    8. 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.
    9. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Risk management; Crown balance sheet;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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