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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.

Macroeconomics --- Economics: General --- Public Finance --- Financial Risk Management --- Multiple or Simultaneous Equation Models: Models with Panel Data --- Fiscal Policy --- Comparative or Joint Analysis of Fiscal and Monetary Policy --- Stabilization --- Treasury Policy --- Structure and Scope of Government: General --- Fiscal Policies and Behavior of Economic Agents: General --- Economic Development: Agriculture --- Natural Resources --- Energy --- Environment --- Other Primary Products --- Nonrenewable Resources and Conservation: Government Policy --- Commodity Markets --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- National Government Expenditures and Related Policies: General --- Macroeconomics: Consumption --- Saving --- Wealth --- Economic & financial crises & disasters --- Economics of specific sectors --- Finance --- Public finance & taxation --- Fiscal policy --- Commodity price fluctuations --- Prices --- Commodity prices --- Sovereign wealth funds --- Asset and liability management --- Expenditure --- Currency crises --- Informal sector --- Economics --- Expenditures, Public --- Consumption

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This paper studies the economic impact of fragmentation of commodity trade. We assemble a novel dataset of production and bilateral trade flows of the 48 most important energy, mineral and agricultural commodities. We develop a partial equilibrium framework to assess which commodity markets are most vulnerable in the event of trade disruptions and the economic risks that they pose. We find that commodity trade fragmentation – which has accelerated since Russia’s invasion of Ukraine – could cause large price changes and price volatility for many commodities. Mineral markets critical for the clean energy transition and selected agricultural commodity markets appear among the most vulnerable in the hypothetical segmentation of the world into two geopolitical blocs examined in the paper. Trade disruptions result in heterogeneous impacts on economic surplus across countries. However, due to offsetting effects across commodity producing and consuming countries, surplus losses appear modest at the global level.

Agricultural commodities --- Agriculture in International Trade --- Agriculture: General --- Balance of trade --- Commercial products --- Commodities --- Commodity exchanges --- Commodity Markets --- Commodity markets --- Commodity price fluctuations --- Currency crises --- Deflation --- E-Commerce --- Economic & financial crises & disasters --- Economic Growth of Open Economies --- Economic Integration --- Economics of specific sectors --- Economics --- Economics: General --- Empirical Studies of Trade --- Energy and the Macroeconomy --- Exports and Imports --- Farm produce --- Finance --- Finance: General --- Financial markets --- General Financial Markets: General (includes Measurement and Data) --- Inflation --- Informal sector --- International economics --- International Policy Coordination and Transmission --- Investment & securities --- Investments: Commodities --- Macroeconomics --- Models of Trade with Imperfect Competition and Scale Economies --- Neoclassical Models of Trade --- Nonrenewable Resources and Conservation: General --- Open Economy Macroeconomics --- Price Level --- Prices --- Renewable Resources and Conservation: Issues in International Trade --- Retail and Wholesale Trade --- Trade: Forecasting and Simulation