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© 2023 International Monetary Fund WP/23/133
IMF Working Paper
Western Hemisphere Department
Do Sovereign Wealth Funds Reduce Fiscal Policy Pro-cyclicality? New Evidence Using a Non-Parametric Approach
Prepared by Ali J. Al-Sadiq and Diego Alejandro Gutiérrez*
Authorized for distribution by Patrizia Tumbarello
June 2023
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.
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.
RECOMMENDED CITATION: Al-Sadiq, Ali and Diego Alejandro Gutierrez, 2023. “Do Sovereign Wealth Funds Reduce Fiscal Policy Pro-cyclicality? New Evidence using a Non-Parametric Approach”, IMF Working paper 23/133. Washington, DC: International Monetary Fund.
| JEL Classification Numbers: | C33; E62; E63; H10; H30; O13; Q38 |
| Keywords: | Sovereign Wealth Funds; Fiscal Policy Procyclicality; Matching Analysis; Commodity-exporting Countries |
| Authors’ E-Mail Address: | aalsadiq@imf.org, dgutierrez@imf.org |
| JEL Classification Numbers: | C33; E62; E63; H10; H30; O13; Q38 |
| Keywords: | Sovereign Wealth Funds; Fiscal Policy Procyclicality; Matching Analysis; Commodity-exporting Countries |
| Authors’ E-Mail Address: | aalsadiq@imf.org, dgutierrez@imf.org |
Title Page
WORKING PAPERS
Do Sovereign Wealth Funds Reduce Fiscal Policy Pro-cyclicality? New Evidence Using a Non-Parametric Approach
Prepared by Ali J. Al-Sadiq and Diego Alejandro Gutiérrez
Contents
Glossary
1. INTRODUCTION
2. THE FREQUENCY AND IMPACT OF COMMODITY PRICE VOLATILITY
3. LITERATURE REVIEW
4. EMPIRICAL ANALYSIS
4.1 The Model
4.1.1 Measuring Discretionary Fiscal Policy Volatility
4.1.2 The Endogeneity of SWF
4.1.3 The Treatment Effect Model
4.1.4 Propensity Score Matching
4.2 Data Sources
5. EMPIRICAL Results
5.1 The Results of the Treatment Effect Model
5.2 The Results of Propensity Score Matching
6. CONCLUSION
References
FIGURES
1. Commodity Price Variability and Unpredictability
2. Commodity Prices and Key Macroeconomic Indicators
3. Macroeconomic Volatility in Commodity-Exporting Countries
4. SWFs Adoption in the Past Decades
TABLES
1. Sovereign Wealth Funds and Volatily of Fiscal Policy: Fixed Effects Model
2. Sovereign Wealth Funds and Volatility of Fiscal Policy: Average Treatment Effects
3. Stabilization Sovereign Wealth Funds and Volatility of Fiscal Policy: Non-Parametric Estimations
Glossary
| ATE | Average Treatment Effect |
| FEM | Fixed Effects Model |
| GDP | Gross Domestic Product |
| GFC | Global Financial Crisis |
| GMM | Generalized Methods of Moments |
| ILS | Instrumental Least Squares |
| OLS | Ordinary-Least Squares |
| PSM | Propensity Score Matching |
| SWF | Sovereign Wealth Fund |
The authors would like to thank Patrizia Tumbarello, Alina Carare, Olusegun Ayodele Akanbi, Veronique Salins, Oliver Basdevant, Jose Luis De Aro, and Irene Yackovlev for their very helpful comments and suggestions on the earlier version of this paper. We would like also to thank Soungbe Coquillat for her assistance in preparing the working paper. All remaining errors are ours.