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Does Crown Financial Portfolio Composition Matter? - WP 01/34

Publication Details

  • Does Crown Financial Portfolio Composition Matter?
  • Published: Dec 2001
  • Status: Current
  • Author: Davis, Nick
  • JEL Classification: H11; H63
  • Hard copy: Available in PDF format only.
 

Does Crown Financial Portfolio Composition Matter?

New Zealand Treasury Working Paper 01/34

Published Dec 2001

Authors: Nick Davis

Abstract

This paper considers Crown financial portfolio composition from a welfare perspective. It argues that a broad definition of the Crown's portfolio is required for analysing the welfare implications of portfolio composition. In practice, this means incorporating the present discounted value of tax and expenditure flows as well as traditional measures of assets and liabilities. Financial portfolio composition affects welfare for a number of reasons: imperfect and incomplete markets; distortionary taxes; externalities; and agency problems. There is unlikely to be a single policy objective for choosing the preferred portfolio composition that integrates all of those factors. However, it is argued that the Crown should be risk averse and aim to eliminate all diversifiable risk in its portfolio. There is a reasonable case for adopting a low-risk Crown portfolio. Importantly, that does not necessarily require a low-volatility financial portfolio.

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