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Macrofinancial Linkages of the Strategic Asset Allocation of Commodity-Based Sovereign Wealth Funds

  • Aaron Howard Clifford Brown
  • Michael G Papaioannou
  • Iva Petrova
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    This paper analyses the links between the investment strategies of a commodity-based SWF and the macroeconomic framework of the owner country. We examine some basic macrofinancial linkages of an SWF's strategic asset allocation (SAA) strategies with regard to the government budget, monetary policy, and exchange rate movements. Based on a simple Markowitz-model framework, which integrates the specific objectives and constraints facing an SWF and the country's specific characteristics and macroeconomic vulnerabilities (especially in relation to commodity prices and prospective defined liabilities), we derive an SAA. The asset-liability methodology that is applied in the selection of an SWF SAA also allows assessing whether (i) the SAA adequately takes into account the country-specific risks and vulnerabilities, and (ii) its objectives and macrofinancial constraints are consistent. Some analytical and practical issues in determining an SAA model are also discussed, along with key effects of a financial crisis.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/9.

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    Length: 32
    Date of creation: 01 Jan 2010
    Date of revision:
    Handle: RePEc:imf:imfwpa:10/9
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    1. Rodrigo O. Valdés & Eduardo Engel, 2000. "Optimal Fiscal Strategy for Oil Exporting Countries," IMF Working Papers 00/118, International Monetary Fund.
    2. Christian B. Mulder & Amadou N. R. Sy & Yinqiu Lu & Udaibir S. Das, 2009. "Setting Up a Sovereign Wealth Fund: Some Policy and Operational Considerations," IMF Working Papers 09/179, International Monetary Fund.
    3. Peter Kunzel & Cornelia Hammer & Iva Petrova, 2008. "Sovereign Wealth Funds: Current Institutional and Operational Practices," IMF Working Papers 08/254, International Monetary Fund.
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