Effectiveness of Sovereign Oil Funds as Instruments of Fiscal Stability: A Panel Data Analysis of the Influence of Sovereign Oil Funds on Government Spending and Fiscal Balance

To enrich the debate about the fiscal effectiveness of sovereign wealth funds, this paper explores the effect of sovereign wealth funds (more precisely sovereign oil funds, SOFs) on the government spending in real term and as a share of GDP. First, we evaluate the relationship between the balance of the funds and the real government spending. We also assess how the improvement of the characteristics of the funds may change the real public spending. Then, we introduce an econometric model that explains government spending as a share of GDP with a set of economic and demographic control variables. Thanks to this model, we compare the government spending of countries that have established funds to countries without funds and we also evaluate the change in government spending before and after the establishment of funds. Furthermore, we determine whether a larger balance of funds is better able to perform its stabilizing function. Finally, we extend the exploration to the influence of sovereign funds on the fiscal balance.