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Measuring and Managing Federal Financial Risk

The U.S. government is the world’s largest financial institution, providing credit and assuming risk through diverse activities. But the potential cost and risk of these actions and obligations remain poorly understood and only partially measured. Government budgetary and financial accounting rules, which largely determine the information available to federal decision makers, have only just begun to address these issues. However, recently there has been a push to rethink how these programs are valued and accounted for, and some progress has been made in applying modern valuation methods—such as options pricing, risk-adjusted discount rates, and value at risk—to these types of obligations.

This book contains new research, both empirical and methodological, on the measurement and management of these costs and risks. The analyses encompass a broad spectrum of federal programs, including housing, catastrophe insurance, student loans, social security, and environmental liabilities. Collectively, the contributions gathered in Measuring and Managing Federal Financial Risk demonstrate that the logic of financial economics can be a useful tool for studying a range of federal activities.


“The methods by which to quantify government fiscal risk have captured increased interest following the global financial crisis. In presenting Measuring and Managing Federal Financial Risk, the editor and authors seek to address both the need for and methods suited to the assessment of a set of the US public sector’s direct and contingent liabilities. . . . These [contributions] may be valuable to graduate students and academic or applied economists wanting insights into the empirical methods that may be used to value alternative forms of government direct and contingent fiscal liability.”

Economic Record

Table of Contents



Deborah Lucas

1. Bringing Financial Literacy to Washington

Peter R. Fisher

2. Measuring and Managing Federal Financial Risk: A View from the Hill

Donald B. Marron

3. The Cost of Risk to the Government and Its Implications for Federal Budgeting

Deborah Lucas and Marvin Phaup

Comment: Henning Bohn

4. Federal Financial Exposure to Natural Catastrophe Risk

J. David Cummins, Michael Suher, and George Zanjani

Comment: Greg Niehaus

5. Housing Policy, Mortgage Policy, and the Federal Housing Administration

Dwight M. Jaffee and John M. Quigley

Comment: Susan M. Wachter

6. Valuing Government Guarantees: Fannie and Freddie Revisited

Deborah Lucas and Robert McDonald

Comment: Alan J. Marcus

7. Guaranteed versus Direct Lending: The Case of Student Loans

Deborah Lucas and Damien Moore

Comment: Janice C. Eberly

8. Market Valuation of Accrued Social Security Benefi ts

John Geanakoplos and Stephen P. Zeldes

9. Environment and Energy: Catastrophic Liabilities from Nuclear Power Plants

Geoffrey Heal and Howard Kunreuther

Comment: William Pizer


Author Index

Subject Index

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