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

Ali Al-Sadiq and Diego Alejandro Gutiérrez

No 2023/133, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: Sovereign Wealth Funds; Fiscal Policy Procyclicality; Matching Analysis; Commodity-exporting Countries; fiscal policy Pro-cyclicality; stabilization sovereign wealth fund; commodity price variability; stabilization SWF; discretionary fiscal policy volatility; Commodity price fluctuations; Commodity prices; Global (search for similar items in EconPapers)
Pages: 31
Date: 2023-06-23
New Economics Papers: this item is included in nep-cis
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