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Optimal fiscal management in an economy with resource revenue‐financed government‐linked companies
Author(s) -
Lim King Yoong,
Zhang Shuonan
Publication year - 2023
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.2533
Subject(s) - dynamic stochastic general equilibrium , economics , sovereign wealth fund , dutch disease , portfolio , monetary economics , profitability index , sovereign default , revenue , resource (disambiguation) , fiscal policy , constraint (computer aided design) , emerging markets , finance , microeconomics , sovereignty , monetary policy , incentive , exchange rate , mechanical engineering , computer network , sovereign debt , politics , law , political science , computer science , engineering
We present a dynamic stochastic general equilibrium (DSGE) model in which a resource‐rich government allocates its excess resource rents between a resource stabilization fund and the facilitation of costly domestic fund‐raising activities of sovereign wealth funds (SWF), which holds a portfolio of government‐linked companies (GLCs). Despite being less productive efficient, GLCs' operation benefits from scale economies tied to the resource sector: its profitability is procyclical to commodity shocks. The model is estimated to Malaysia using the Bayesian approach, with the results suggesting a business cycle heavily influenced by resource shocks. Based on this, we solve numerically for a socially optimal combination of excess resource savings allocation. We find the present allocation to be sub‐optimal, regardless of the structural shocks. This suggests that the Malaysian economy might have hit its absorptive capacity constraint (i.e., a domestic economy saturated by GLCs).