The Role of Sovereign Wealth Funds in Promoting the External Stability of the Home Economy

Abstract

Sovereign Wealth Funds (SWFs) are currently playing an important role in the global economy. We investigated the role of SWFs in promoting the external stability of the home economy using a data set spanning 106 countries over the period (1997-2015), whereby Arellano- Bond dynamic panel data models were employed to assess the treatment effect of SWFs on both the level of the current account balance and its volatility. Empirical results revealed that SWFs can play an important role in smoothing the management of the current account balance in the long run. Nonetheless, commodity-based SWFs are expected to outperform non-commodity based SWFs in this respect. Our policy recommendation is that emerging economies should consider the establishment of SWFs to enhance the external stability of their home economies, allocating privatization proceeds to these investment vehicles to protect the rights of future generations in benefiting from them rather than directing such proceeds to finance current government expenditure and budget deficit. Finally, attention should be paid to the implementation of the generally accepted principles and practices when establishing SWFs to ensure their ability to function properly.