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Int. J. Financial Stud. 2019, 7(1), 4; https://doi.org/10.3390/ijfs7010004

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

Department of Economics, Norwegian University of Science and Technology, 7491 Trondheim, Norway
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Received: 29 November 2018 / Revised: 29 December 2018 / Accepted: 31 December 2018 / Published: 9 January 2019
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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. View Full-Text
Keywords: fiscal policy; sovereign wealth funds; portfolio choice fiscal policy; sovereign wealth funds; portfolio choice
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Lindset, S.; Mork, K.A. Risk Taking and Fiscal Smoothing with Sovereign Wealth Funds in Advanced Economies. Int. J. Financial Stud. 2019, 7, 4.

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Int. J. Financial Stud. EISSN 2227-7072 Published by MDPI AG, Basel, Switzerland RSS E-Mail Table of Contents Alert
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