Optimal fiscal management in an economy with resource revenue‐financed government‐linked companies

We present a dynamic stochastic general equilibrium (DSGE) model in which a resource‐rich government allocates its excess resource rents between a resource stabilization fund and the facilitation of costly domestic fund‐raising activities of sovereign wealth funds (SWF), which holds a portfolio of government‐linked companies (GLCs). Despite being less productive efficient, GLCs' operation benefits from scale economies tied to the resource sector: its profitability is procyclical to commodity shocks. The model is estimated to Malaysia using the Bayesian approach, with the results suggesting a business cycle heavily influenced by resource shocks. Based on this, we solve numerically for a socially optimal combination of excess resource savings allocation. We find the present allocation to be sub‐optimal, regardless of the structural shocks. This suggests that the Malaysian economy might have hit its absorptive capacity constraint (i.e., a domestic economy saturated by GLCs).