Looking Beyond the Fiscal: Do Oil Funds Bring Macroeconomic Stability?

IMF Working Papers, April 1, 2007

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Oil funds have become increasingly popular in oil exporting countries during the recent surge in oil prices.
Existing literature is small, focuses narrowly on fiscal benefits, and often concludes that well designed fiscal management and policy are adequate substitutes for oil funds.
This paper argues for a broader focus: whether oil funds help reduce macroeconomic volatility.
The econometric estimation results from a 30-year panel data set of 15 countries with and without oil funds suggest:
- oil funds are associated with reduced volatility of broad money and prices;
- oil funds are associated with lower inflation;
- there is a statistically weak negative association between the presence of an oil fund and volatility of the real exchange rate.

Data and estimation:
- 30-year panel data set.
- Sample includes 15 countries with and without oil funds.
Key empirical associations:
- Reduced volatility of broad money.
- Reduced volatility of prices.
- Lower inflation.
- Statistically weak negative association with volatility of the real exchange rate.

Judging the effectiveness of oil funds requires a broader perspective than fiscal outcomes alone; macroeconomic volatility outcomes matter.
Findings imply potential stabilization benefits of oil funds beyond fiscal smoothing, notably for monetary aggregates and price stability.
The weak association regarding real exchange rate volatility suggests limited or uncertain effectiveness of oil funds in stabilizing exchange rate movements.

IMF Working Paper No. 2007/096 (Ghiath Shabsigh and Nadeem Ilahi, April 1, 2007).