Risk Taking and Fiscal Smoothing with Sovereign Wealth Funds in Advanced Economies
Journal article
Published version
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http://hdl.handle.net/11250/2600313Utgivelsesdato
2019Metadata
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Sammendrag
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.