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Sovereign wealth funds and macroeconomic stability in oil‐exporting African countries
Author(s) -
Rasaki Mutiu Gbade,
Malikane Christopher
Publication year - 2018
Publication title -
opec energy review
Language(s) - English
Resource type - Journals
eISSN - 1753-0237
pISSN - 1753-0229
DOI - 10.1111/opec.12128
Subject(s) - economics , volatility (finance) , monetary economics , shock (circulatory) , boom , exchange rate , revenue , oil price , sovereign wealth fund , debt , macroeconomics , international economics , finance , medicine , foreign direct investment , environmental engineering , engineering
This paper investigates the effectiveness of sovereign wealth funds ( SWF s) in reducing macroeconomic volatility occasioned by oil price shocks in oil‐exporting African countries. The oil price boom‐bust cycles complicate fiscal operations, distort budget implementation and trigger macroeconomic instability in oil exporting African countries. We formulate and simulate a dynamic stochastic general equilibrium model that features SWF s and the fiscal sector. We compare a baseline model without the SWF s to a model with the SWF s. The simulation analysis suggests that the establishment of SWF s can mitigate the vulnerability of oil‐exporting African countries to oil price shocks. In particular, SWF s can reduce fiscal expenditure and real exchange rate volatility. Furthermore, SWF s can stabilise the level of external debt and reduce the level of money supply thereby sterilising the oil revenue. Since oil price shock is one of the important external shocks inducing economic instability in oil‐exporting African countries, the creation of SWF s can insulate these economies from external shocks.