Sovereign Wealth Funds, Macroeconomic Policy Alignment and Financial Stability

21 Pages Posted: 16 Jun 2009

See all articles by Chao Chen

Chao Chen

China Investment Corporation

Date Written: November 21, 2008

Abstract

This paper firstly discusses alignment of SWFs with macroeconomic policy. We believe that SWFs can become an effective tool for fiscal policy; SWF investments should be made in alignment with the monetary authority, and help stabilize the exchange rate. SWFs also contribute to stability of the national balance sheet. Asset allocation of SWFs has significant impacts on the current and capital accounts of both domestic and international balance sheets. Secondly, this paper explores the impacts of SWFs on the global financial market and its stability, including those on asset bubbles, equity risk premium and financial market stability. We argue that the potential negative impact of SWFs on the global financial market is very limited, and that they are important stabilizing forces in the global financial market. We believe that SWFs contribute to the coordination of macroeconomic policy from a domestic point of view and to the stability of global financial market from an international point of view.

Keywords: Sovereign Wealth Fund, Macroeconomic Policy, Financial Stability

Suggested Citation

Chen, Chao, Sovereign Wealth Funds, Macroeconomic Policy Alignment and Financial Stability (November 21, 2008). Available at SSRN: https://ssrn.com/abstract=1420614 or http://dx.doi.org/10.2139/ssrn.1420614

Chao Chen (Contact Author)

China Investment Corporation ( email )

New Poly Plaza, No.1 Chaoyangmen
Beidajie, Dongcheng
Beijing, 100010
China

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