IMF Working Papers

Do Sovereign Wealth Funds Reduce Fiscal Policy Pro-cyclicality? New Evidence Using a Non-Parametric Approach

By Ali J Al-Sadiq, Diego Alejandro Gutiérrez

June 23, 2023

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Format: Chicago

Ali J Al-Sadiq, and Diego Alejandro Gutiérrez. Do Sovereign Wealth Funds Reduce Fiscal Policy Pro-cyclicality? New Evidence Using a Non-Parametric Approach, (USA: International Monetary Fund, 2023) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Asset and liability management, Commodity price fluctuations, Commodity prices, Expenditure, Fiscal policy, Prices, Sovereign wealth funds

Keywords: Commodity price fluctuations, Commodity price variability, Commodity prices, Commodity-exporting Countries, Discretionary fiscal policy volatility, Fiscal policy Pro-cyclicality, Fiscal Policy Procyclicality, Global, Matching Analysis, Sovereign Wealth Funds, Stabilization sovereign wealth fund, Stabilization SWF

Publication Details

  • Pages:

    31

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2023/133

  • Stock No:

    WPIEA2023133

  • ISBN:

    9798400244810

  • ISSN:

    1018-5941

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