Managing Public Portfolios

Abstract

We study optimal public portfolios in a class of macro-finance models that includes widely used specifications of households’ risk and liquidity preferences, market structures for financial assets, and trading frictions. An optimal portfolio hedges fluctuations in interest rates, primary surpluses, and income inequalities. We express an optimal portfolio in terms of statistics that are functions only of macro and financial market data. An application to US data shows that hedging interest rate risk plays a dominant role in shaping an optimal maturity structure of US government debt.