Hiding the Losses: Fiscal Transparency and the Performance of Government Portfolios of Financial Assets

Abstract

The widespread reliance on gross government debt and deficit/surplus as indicators of fiscal performance has too often neglected the role played by other important parts of a government's balance sheet including their portfolios of financial assets. Partial measures of net worth leaves an important gap in the empirical literature on financial performance and fiscal transparency. The purpose of this paper is to examine the role played by equity investments and their performance in secondary markets. The results suggest that the performance of government equity portfolios correlates strongly with fiscal transparency to the extent that fully transparent governments are expected to generate around 7 percent higher returns than fully opaque governments. We also find strong evidence of governments willingness to inject liquidity, via investing in equities, into other sectors of the economy during periods of financial crisis confirming governments’ role as an ‘investor of last resort’.