Effect of sovereign wealth funds in commodity‐exporting economies when commodity prices affect interest spreads

Abstract

We reconsider the role of a sovereign wealth fund in commodity‐exporting economies facing recent volatile fluctuations of commodity prices due to the COVID‐19 shock. We examine the welfare‐improving effect of a sovereign wealth fund from the new perspective of the link between commodity prices and interest rate spreads, which is unique to emerging economies. We show that a sovereign wealth fund becomes more effective in improving welfare for commodity‐exporting economies with a stronger link between their commodity prices and interest rate spreads.