Setting up a sovereign wealth fund to reduce currency crises

Abstract

This paper assesses whether and how setting up a sovereign wealth fund has a buffer effect against currency crises. Using an innovative dynamic logit panel model framework and a unique dataset covering 34 emerging countries over the period 1989–2019, we empirically show that sovereign wealth funds reduce the occurrence of currency crises. This result is robust to different econometric specifications, alternative definitions of sovereign wealth funds, controlling for currency crisis risk factors, and income level sampling. Our findings have important implications for financial stability and for policymakers, who could further exploit the potential of sovereign wealth funds to better manage foreign exchange risks.