BettingontheFuturewithaCloudyCrystalBall课件.ppt

Betting on the Future with a Cloudy Crystal Ball? Spending, Taxing, Saving, and Borrowing A balanced budget Portfolio management Hedging Self-insurance Optimal spending rules Lesson Trying to balance budgets (match spending to taxing) one year at a time leads to manic-depressive spending and taxing patterns This is costly, both directly in terms of the expedients taken to balance budgets and indirectly from a macroeconomic perspective The problem faced by budget makers derives from volatility in revenue growth. Lesson Economists cannot accurately predict revenue growth from one year to the next or the timing of the business cycle, but we can make actuarial predictions Mean/variance analysis Example: Classical Multiplicative Decomposition Example: Classical Multiplicative Decomposition Example: Classical Multiplicative Decomposition Example: Classical Multiplicative Decomposition, Model Interpretation Example: Classical Multiplicative Decomposition, Forecasts Forecast Model Assessment Residual analysis: Residual (Error) = Actual – Forecast Assessment possible for any type of forecasting process. Second section: portfolio theory Lesson Most states cannot significantly reduce volatility in revenue growth by substituting one tax type for another (e.g. a broad-based foods and services taxes for in income tax, or vice versa). Lesson Unsystematic volatility in revenue growth can be significantly reduced via a well-designed portfolio of tax types. Diversification of tax types can reduce revenue volatility: most states rely on a portfolio of tax types. How does diversification of tax portfolios work? The answer is that portfolio volatility is a function of the covariance or correlation, ?, of its component revenue sources Diversification of tax types Implications of portfolio theory In general, tax sources have ????0.65, so adding taxes to the portfolio tends to reduce but not eliminate volatility. It is possible to construct an efficient growth frontier, showin