Journal of Energy Markets

Risk.net

Do sovereign wealth funds dampen the effect of oil market volatility on gross domestic product growth?

Salem Boubakri and Ahlem Harrouch-Trabelsi

  • This study is concerned with the role of sovereign wealth funds established by oil exporting countries to dampen the effect of oil market volatility on real economic growth.
  • We rely on a panel smooth transition regression model to test the effect of oil price volatility on real GDP growth.
  • The results highlight that the effect of oil price volatility on real GDP growth, in six oil-exporting countries, is non-linear and depends on the importance of sovereign wealth fund asset growth.
  • The effect is only dampened in the second regime (i.e., above the threshold value of 19%), especially when the growth of sovereign wealth fund assets reaches a high level.

This paper examines the effect of oil price volatility on gross domestic product (GDP) growth in some oil-exporting countries. The analysis becomes more pertinent when we consider the role of sovereign wealth funds (SWFs) as a driver to counter the exhaustibility of revenue by transforming nonrenewable resources into sustainable income. The main contribution made by this paper is our assessment of the role of SWF asset growth in dampening the effect of oil market volatility on GDP growth. To test this effect, we rely on a panel smooth transition regression model which is useful for describing heterogeneous panels, with regression coefficients that fluctuate between a limited number of “extreme regimes” depending on the SWF assets’ size. Our findings demonstrate that this effect is nonlinear and depends on the threshold level of SWF asset growth. The estimated coefficient is negative in the first regime and becomes positive beyond the threshold value (ie, 19%) in the second regime. We also test a second specification of the model by considering the effect of the volatility of per capita oil export revenue on GDP growth and show that SWF asset growth plays a significant role in dampening the effect of oil market volatility on GDP growth, mainly in the second regime when SWF asset growth reaches a high growth level.

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