Sovereign Wealth Funds

02/22/2008
Working Paper

This paper analyzes the rationale for sovereign wealth funds and the implications for the world economy. It is divided in six sections, the first of which is the introduction. Section II details the evolution of foreign exchange assets in different parts of the developing world, the relative importance of the current vs. the capital accounts as the source of those assets, and discusses some categorizations of SWFs.

Author(s)

In Section III we review the rapidly growing literature on the determinants of reserve accumulation in developing countries, emphasizing in particular the competitiveness vs. self-insurance motives for such accumulation, and briefly examine some of the literature on optimal reserves. In Section IV, we develop a broader framework for the analysis of the motives for the accumulation of foreign exchange assets, in which we clearly differentiate between the role played by the current and the capital accounts, and between the structural vs. cyclical determinants of such accounts, and raise some political economy issues associated with the nature and management of these funds. In section V, we analyze the systemic implications of the analysis for the global and regional financial architectures and in section VI we draw some conclusions.