Working Paper: NBER ID: w30501
Authors: Leo R. Aparisi De Lannoy; Anmol Bhandari; David Evans; Mikhail Golosov; Thomas J. Sargent
Abstract: We develop a unified framework for optimally managing public portfolios for a class of macro-finance models that include widely-used specifications for households' risk and liquidity preferences, market structures for financial assets, and trading frictions. An optimal portfolio hedges fluctuations in interest rates, primary surpluses, liquidities and inequalities. It recognizes liquidity benefits that government debts provide and internalizes equilibrium effects of public policies on financial asset prices. We express an optimal portfolio in terms of statistics that are functions only of macro and financial market data. An application to the U.S. shows that hedging interest rate risk plays a dominant role in shaping an optimal maturity structure of government debt.
Keywords: public portfolios; government debt; macroeconomic models
JEL Codes: E63; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Optimal government portfolio (G11) | Hedging fluctuations in interest rates (E43) |
| Optimal government portfolio (G11) | Hedging primary surpluses (H62) |
| Optimal government portfolio (G11) | Hedging liquidity risks (G33) |
| Optimal government portfolio (G11) | Stability of financial asset prices (G19) |
| Maturity structure (G32) | Portfolio performance (G11) |
| Interest rate risk (E43) | Target portfolio (G11) |