Indeed, the development of SWFs can in some cases to be related to the increasing reliance on fully-funded government pension schemes, which often share a similar approach to asset allocation. For instance, Norway’s Government Pension Fund – Global, the continuation of its Petroleum Fund, is managed with respect to a strategic benchmark that holds 40% of its assets in equities, 50% of which are outside Europe. In the case of several East Asian economies, the transfers from official reserves to SWFs therefore entail a loss of the liquidity services from holding reserve assets. But to the extent that expected returns are higher, one benefit of investing in riskier assets is a reduction in the fiscal cost of sterilisation. The strategic asset allocation of SWFs could in principle be designed in relation to the specific risk exposures of the country. Emerging market economies are characterised by a range of vulnerabilities to global macroeconomic shocks such as sharp changes in oil, metals or agricultural commodities prices, as well as the business cycles fluctuations of developed economies. For instance, it seems intuitive that the optimal asset allocation of oil-producing countries should be diversified into assets uncorrelated with oil prices. By contrast, most Asian countries are commodity importers and could hedge their risks with long positions on commodities futures and other assets that are highly correlated with commodities prices. SWFs can thus potentially provide macro-hedging services to their countries.

Such effect is usually known as a sudden-stop in capital inflows and the mechanics of the process is not too different from the disrupting effect of the financial accelerator on the credit channel of monetary policy in developed countries. 8 Finally, even an analysis of trade and financial integration, while improving our understanding of complex open economic systems, may fall short of explaining the synchronisation of real and financial cycles. Since cyclical patterns are largely attributable to different cost structures and profitability profiles that affect investment decisions and output volatilities, another  5  Meller, B., Metiu, N. (2015): The synchronisation of European credit cycles, Discussion Paper No. 20/2015, Deutsche Bundesbank. 6  Drehmann, M., Borio, C., Tsatsaronis, K. (2012): Characterising the financial cycle: don’t lose sight of the medium term!, BIS Working Papers No 380, Monetary and Economic Department. 7  Duval, R., Cheng, K., Hwa Oh, K., Saraf, R., Seneviratne, D. (2014): Trade Integration and Business Cycle Synchronization: A Reappraisal with Focus on Asia, IMF Working Paper 14/52; Davis, S. (2011): Financial Integration and International Business Cycle Co-Movement: The Role of Balance Sheets, Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute, Working Paper No. 89. 8  Bernanke B.S., speech at the Credit Channel of Monetary Policy in the Twenty-first Century Conference, Federal Reserve Bank of Atlanta, Atlanta, Georgia, June 15, 2007. BIS central bankers’ speeches  3  potential explanation should be sought on the production side, which operates in conjunction with trade and finance.