The Economics of Sovereign Wealth Funds
The Economics of Sovereign Wealth Funds
Sovereign wealth funds are designed to solve specific economic and financial problems. Surplus capital inflows, primarily from commodity dependent states, threaten to cause currency appreciation and increase inflation. This chapter will focus on the economics of sovereign wealth funds and the common policy dilemmas facing these countries. Drawing upon the extensive economics literature focusing on commodity dependent states, this chapter focuses on why do sovereign wealth funds exist, what problems are they designed to solve, and how well do sovereign wealth funds address these problems. Contrary to popular belief, sovereign wealth funds are not political creations, but were created for economic reasons to address specific economic problems and are created in countries with very specific challenges. Countries with large current account surpluses, primarily from natural resource exporting, need to stabilize their inflows and investment patterns to smooth volatile commodity prices. The impact of these structural inflows has not been considered and what economic policies might better suit countries with surpluses has not been fully considered in the sovereign wealth fund debate. This chapter will study, in non-technical language, sovereign wealth funds and the unique set of economic issues faced by their domestic economies.
Keywords: sovereign wealth funds, foreign reserves, balance of payment, capital account, commodities, oil dependence, inflation
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