EconPapers    
Economics at your fingertips  
 

Risk Taking and Fiscal Smoothing with Sovereign Wealth Funds in Advanced Economies

Snorre Lindset and Knut Anton Mork ()
Additional contact information
Knut Anton Mork: Department of Economics, Norwegian University of Science and Technology, 7491 Trondheim, Norway

International Journal of Financial Studies, 2019, vol. 7, issue 1, 1-1

Abstract: In an economy with a sovereign wealth fund (SWF), the government may draw on the fund to supplement other government revenues. If the fund is invested in risky assets, this introduces a new stochastic element into the government’s budget. We analyze the interaction between the draw from and risk taking in the SWF. Using non-expected utility preferences, we distinguish between intended changes and stochastic changes in the SWF draws over time. We show that the desire for smoothness in taxes and public services translates into smoothing of SWF draws and lower risk taking. It can even lead to procyclical rebalancing of the SWF portfolio. Future interest rates are associated with interest-rate risk. We show that this risk may lead to a higher optimal equity share in the SWF portfolio. Policy makers can use the draws from the SWF to smooth over time variation in risk-free rates.

Keywords: fiscal policy; sovereign wealth funds; portfolio choice (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 F2 F3 F41 F42 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
https://www.mdpi.com/2227-7072/7/1/4/pdf (application/pdf)
https://www.mdpi.com/2227-7072/7/1/4/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jijfss:v:7:y:2019:i:1:p:4-:d:196279

Access Statistics for this article

International Journal of Financial Studies is currently edited by Prof. Dr. Nicholas Apergis

More articles in International Journal of Financial Studies from MDPI, Open Access Journal
Bibliographic data for series maintained by XML Conversion Team ().

 
Page updated 2021-01-05
Handle: RePEc:gam:jijfss:v:7:y:2019:i:1:p:4-:d:196279