Do Sovereign Wealth Funds Reduce Fiscal Policy Pro-cyclicality? New Evidence Using a Non-Parametric Approach
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Summary:
The heightened volatility of commodity prices in recent years, reflecting the effects of the pandemic and the war in Ukraine, begs the longstanding question of the optimal fiscal policy response to commodity price shocks. Fiscal performance in most commodity-exporting countries is typically shaped by shifts in commodity prices and economic activity, often resulting in procyclical fiscal policy. One way to minimize the procyclicality of fiscal policy is to set up a stabilization Sovereign Wealth Fund (SWF). While such funds can help smooth government consumption in good and bad times, the empirical evidence of their value so far has been inconclusive. However, using an unbalanced panel dataset for 182 countries during 1980-2019, with two econometric methods that address the selection-bias problem, we provide robust evidence that stabilization SWFs do indeed help smooth government consumption by reducing fiscal policy volatility associated with commodity price fluctuations.
Series:
Working Paper No. 2023/133
Subject:
Asset and liability management Commodity price fluctuations Commodity prices Expenditure Fiscal policy Prices Sovereign wealth funds
Frequency:
regular
English
Publication Date:
June 23, 2023
ISBN/ISSN:
9798400244810/1018-5941
Stock No:
WPIEA2023133
Format:
Paper
Pages:
31
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