TY - JOUR
T1 - Asset class diversification and delegation of responsibilities between a central bank and sovereign wealth fund
AU - Aizenman, Joshua
AU - Glick, Reuven
N1 - Publisher Copyright:
© 2014 by the Association of the International Journal of Central Banking. All rights reserved.
PY - 2014/9/1
Y1 - 2014/9/1
N2 - This paper presents a model comparing the degree of asset class diversification abroad by a central bank and a sovereign wealth fund. We show that if the central bank manages its foreign asset holdings in order to meet balance-of-payments needs, particularly in reducing the probability of sudden stops in foreign capital inflows, it will place a high weight on holding safer foreign assets. In contrast, if the sovereign wealth fund, acting on behalf of the Treasury, maximizes the expected utility of a representative domestic agent, it will opt for relatively greater holding of more risky foreign assets. We also show how the diversification differences between the strategies of the bank and sovereign wealth fund are affected by the government’s delegation of responsibilities and by various parameters of the economy, such as the volatility of equity returns and the total amount of public foreign assets available for management.
AB - This paper presents a model comparing the degree of asset class diversification abroad by a central bank and a sovereign wealth fund. We show that if the central bank manages its foreign asset holdings in order to meet balance-of-payments needs, particularly in reducing the probability of sudden stops in foreign capital inflows, it will place a high weight on holding safer foreign assets. In contrast, if the sovereign wealth fund, acting on behalf of the Treasury, maximizes the expected utility of a representative domestic agent, it will opt for relatively greater holding of more risky foreign assets. We also show how the diversification differences between the strategies of the bank and sovereign wealth fund are affected by the government’s delegation of responsibilities and by various parameters of the economy, such as the volatility of equity returns and the total amount of public foreign assets available for management.
UR - http://www.scopus.com/inward/record.url?scp=84906967304&partnerID=8YFLogxK
M3 - Article
AN - SCOPUS:84906967304
SN - 1815-4654
VL - 10
SP - 129
EP - 161
JO - International Journal of Central Banking
JF - International Journal of Central Banking
IS - 3
ER -