Abstract
In recent years, several energy-exporting economies have established sovereign wealth funds (SWFs), which invest part of their resource rents in foreign assets. This paper investigates whether these SWFs can help to reduce the volatility of real exchange rate (RER) misalignments by dampening the transmission of energy prices. Using a database on 24 oil-producing countries, we rely on recent advances in the panel cointegration literature to determine a measure for RER misalignment. Our results show evidence that establishing a SWF is associated with a reduction in the volatility of RER misalignments, with a more pronounced magnitude when the fixedness of the exchange rate regime increases. This finding is robust to various sensitivity analyzes.
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