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Setting Up Sovereign Wealth Fund

In: Social Issues

Submitted By IsmayilAziz
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“Setting up a Sovereign Wealth Fund: Some Policy and Operational Considerations”, Udaibir S. Das, Yinqiu Lu, Christian Mulder, and Amadou Sy, August 2009
Das, Lu, Mulder, Sy (2009) setting up a Sovereign Wealth Fund (SWF) and provides relevant recommendations for policy makers. At the outset, it says: “policymakers should optimally consider both their sovereign assets and liabilities together with their macroeconomic objectives, when setting up an SWF.”

On “ What is a Sovereign Wealth Fund?” section of the paper, the authors provides the definition of SWF by stating that these Funds are created for macroeconomics purposes in order to “ to hold, manage, or administer financial assets to achieve financial objectives”.

On the next section, “When to Set up an SWF?” the paper argues that there is no certain time to establish SWF by using “fiscal surpluses and accumulated foreign exchange reserves” and it is totally up to the choices of relevant countries. Nevertheless, it was highlighted in the paper that in practice actually countries establish SWF “in a more ad hoc basis”. In other words, the paper states that “Compared with a traditional investment approach, which assumes that investors perceive their assets as fungible, behavioral finance assumes that investors tend to group their assets in a number of non-fungible accounts, and make decisions differently depending on the purpose for setting up the account.”

Later, under the section of “When are a Country’s Reserves Adequate?”, the authors are endeavoring to convey their messages to the policy makers by emphasizing that the sufficient official reserves is a hint to estimate whether the reserves should be managed and invested differently or not. They underline that it is crucial to establish the ““adequate” or “optimal” level of reserves should be established and agreed between the central bank and the government.”

All in all, this paper offers an opportunity to identify areas where research in macroeconomics and finance should give further answers, for example, the level of adequate reserves or revenues, the optimal level of foreign debts that a country should hold and not use foreign assets to repay, and in general the theory on the sovereign asset liability management.

1. Small investment 2. People move from rural-urban 3. Rural areas become poor.…...

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