Comment on: “Macroeconomic consequences of terror: theory and the case of Israel”

This paper is a pioneering attempt to take a systematic look at the effects of terror in Israel. It presents a theoretical analysis of the macroeconomic consequences of terror followed by empirical evidence for Israel. The theory part utilizes a steady state version of Blanchard (1985) finite lives model in which each individual faces a constant probability of death at every moment. The empirical part is, for the most part, based on level and first difference VAR's between GNP, non durable consumption, investment and exports (all in per capita terms) augmented by a proxy for the intensity of terror and a measure of the real rate of interest. The theory is used as a broad guiding device to qualitatively guide the empirical work rather than for providing a precise structure to be estimated.The main implications of the theory are that, by raising the probability of death, an increase in terror reduces investment, production and consumption. Essentially, by increasing the probability of death d, an increase in terror activity reduces the incentive to save and with it the steady state level of capital, production and consumption. In parallel the increase in d raises the interest rate and reduces total wealth. The paper augments Blanchard's model with a welfare maximizing government that responds to the increase in terror activity by raising government expenditures designed to partially offset its impact on the probability of death.The main results of the empirical part are that, in Israel, the terror variable exerts a negative and significant impact on the macroeconomic variables mentioned above. A counterfactual experiment implies that if terror continues at the level it had been at (between the last quarter of 2002 and the third quarter of 2003) up to the third quarter of 2005 then, in comparison to a no terror benchmark, annual GDP per capita is lower by roughly 2 percent per year, non durable consumption per capita is lower by 1 percent per year and the level of investment per capita is lower by 10 percent annually. The paper also contains an empirical analysis of the differential impact of terror on domestic versus foreign tourists.My discussion focusses on possible broader interpretations of the main empirical results of the paper in light of its theoretical model and of the Israeli political and economic scene since the inception of the Oslo peace process in the mid nineties.     

Government size and economic growth in emerging market economies: a panel co-integration approach

A significant positive influence of both government size and domestic investment on economic growth is found in the long run during 1970–2006 for a sample of 19 emerging market economies, employing panel co-integration testing and estimating the parameters using dynamic ordinary least square method, for all the indicators, excepting the case when one chooses general government final consumption expenditure as a percentage of GDP a measure of government size and gross capital formation as a percentage of GDP a measure of domestic investment, with per capita GDP a proxy for economic growth. The findings corroborate the argument that diverse results of the earlier studies are due to different measures adopted.     

Household Response to Government Debt: Evidence from Life Insurance Holdings

We use state‐level panel data on life insurance in force in the United States and find that a $1 increase in government debt, at either the state or federal level is associated with a $0.96 increase in the face value of the average life insurance holdings per capita for a household in the average state. This increase represents an intention to save that would almost completely offset the government debt in specific states of the world (i.e., if the insured dies). Because this state of the world is rare, the immediate increase in actual savings is only about $0.03, the cost of the additional insurance. We find, in addition, that this response occurs mainly on the intensive margin, meaning that the size of the average life insurance policy increases when government debt increases. Along the extensive margin, we find the number of policies in force falls slightly with federal debt, and rises slightly with state debt increases. The results show altruistic planning in response to changes in government debt that are consistent with Ricardian Equivalence and the long‐run neutrality of government debt.     

Borrowing to Finance Public Investment? The ‘Golden Rule of Public Finance’ Reconsidered in an Endogenous Growth Setting*

In this paper, we look for long‐run and short‐run effects of fiscal deficits on economic growth and welfare in a standard endogenous growth model. We show that, under very general hypotheses, the ‘golden rule of public finance’, which allows a government to run public‐investment‐oriented fiscal deficits, leads to a lower balanced‐growth path in the long run, and eventually in the short run, compared with balanced‐budget rules. Welfare effects are more difficult to assess, and depend on the form of the utility function. Our model shows that debt rules such as the golden rule may improve (if the consumption elasticity of substitution is ‘low’) or weaken (if the consumption elasticity of substitution is ‘high’) intertemporal welfare. Consequently, a balanced‐budget rule does not necessarily dominate debt rules from the point of view of welfare, while it does from the point of view of long‐run economic growth.     

China's Abolition of the Agricultural Tax,Local Governments’ Responses and Economic Growth

When evaluating agricultural policy changes, much of the attention in the literature has been limited to agricultural productivity growth. This study demonstrates that, under a regionally decentralised authority system, the effect of China's abolition of the agricultural tax (AAT) in 2004–05 extended beyond the realm of agriculture. We find that, following the AAT reform, Chinese counties with higher reliance on agricultural taxation for budgetary revenue prior to the AAT reform experienced higher agricultural economic growth, as expected, but lower non‐agricultural economic growth in the short run. This growth‐inhibiting effect of the AAT reform on non‐agricultural production in the short run can be explained, to some extent, by the increased non‐agricultural taxation due to the insufficient funds that Chinese county governments received from the upper‐level governments following the AAT reform; the magnitude of this tax increase was associated with the degree to which each county relied on agricultural taxation for budgetary revenue prior to the reform. In addition, our results show that the AAT reform resulted in a high level of regional inequality in terms of non‐agricultural GDP per capita. In summary, our study shows that although the AAT reform succeeded in promoting agricultural production, such accomplishments were achieved at the cost of lower non‐agricultural output growth and higher regional inequality of non‐agricultural GDP per capita at the county level.     

The Impact of Financial Development on Energy Demand: Evidence from China

An autoregressive distributed lag (ARDL) bounds approach and vector error correction model (VECM) are used here to better understand the role of financial development in energy demand in China. Based on data from 1980 to 2014, the ARDL bounds approach yields empirical evidence that confirms the existence of long-run relationships among energy demand per capita, gross domestic product per capita, urbanization, economic structure, and financial development. The VECM framework shows the direction of Granger causality that combines the short run and the long run between the variables. The results suggest a feedback effect between financial development and energy demand per capita in the long run. However, financial development Granger causes per capita energy demand without a feedback effect in the short run. The results of this research may be of great importance for decision makers as they develop policies on energy and economic growth.     

Differences in Hours Worked in the OECD: Institutions or Fiscal Policies?

We study the determinants of the level and the evolution of per capita hours worked in a panel of OECD countries since the 1970s. Following Pesaran (2006) , our empirical strategy allows for the possibility of cross‐sectionally correlated error terms due to unobserved common factors, which are potentially nonstationary. We find that much of the variation in per capita hours worked across countries and over time can be explained by differences in the level and structure of taxes and government expenditures. Differences in (the evolution of) labor and product market institutions have much less of a role to play. Our results show that a careful treatment of the time‐series properties of the data is crucial.     

基于政府债务视角的地方经济发展影响因素研究

近年来,我国各级地方政府融资平台发展迅速,地方政府债券受到各地追捧,本文就这一现象带来的后果进行深入分析,从政府债务从手探讨影响地方经济发展的相关因素。本文以全国30个省（不包括西藏）作为研究对象,收集其在2008年至2012年期间人均GDP增长率、政府负债余额、固定资产投资额、进出口总额、人均GDP等指标的数值进行实证分析。研究结果表明,政府债务与地方经济发展呈倒“U”型关系。     

The Puzzle of Persistently Negative Interest‐Rate–Growth Differentials: Financial Repression or Income Catch‐Up?

The interest‐rate–growth differential (IRGD) plays a critical role in determining the sustainability of government debt. Yet it is striking that IRGDs are correlated with income levels, and are generally negative in emerging and developing economies, which contradicts standard economic theory. Negative IRGDs constitute a powerful debt‐stabilising force, driving down debt ratios or keeping them stable even in the presence of persistent primary deficits. Motivated by the puzzling facts, this paper examines the IRGDs for a large panel of advanced and non‐advanced economies by utilising a newly assembled data set. The evidence shows that large negative IRGDs in emerging and developing economies are largely due to real interest rates well below market equilibrium – stemming from financial repression and captive and distorted markets – whereas the income catch‐up process plays a relatively modest role. Therefore, the IRGD in non‐advanced economies is likely to rise with financial market development and financial global integration, perhaps even before their GDP per capita converges to advanced‐economy levels.     

Spending Reversals and Fiscal Multipliers under an Interest Rate Peg

This paper examines whether fiscal stimuli are more effective when the monetary policy is less responsive to inflation. First, we provide empirical evidence suggesting that, in the period of U.S. passive monetary policy, a positive government spending shock was followed over time by a spending cut. Second, our theoretical analysis reveals that the pegged nominal interest rate is not a sufficient condition to generate a large fiscal multiplier. An increase in government spending could increase the long‐run real interest rate, if it is associated with a government spending reversal and a less responsive monetary policy. Consequently, the response of private consumption can be negative and the government spending multiplier is not necessarily greater than 1.     

The Earnings Effects of Multilateral Trade Liberalization: Implications for Poverty

Most researchers examining poverty and multilateral trade liberalizationhave had to examine average, or per capita effects, suggestingthat if per capita real income rises, poverty will fall. Thisinference can be misleading. Combining results from a new internationalcross-section consumption analysis with earnings data from householdsurveys, this article analyzes the implications of multilateraltrade liberalization for poverty in Indonesia. It finds thatthe aggregate reduction in Indonesia's national poverty headcountfollowing global trade liberalization masks a more complex setof impacts across groups. In the short run the poverty headcountrises slightly for self-employed agricultural households, asagricultural profits fail to keep up with increases in consumerprices. In the long run the poverty headcount falls for allearnings strata, as increased demand for unskilled workers liftsincomes for the formerly self-employed, some of whom move intothe wage labor market. A decomposition of the poverty changesin Indonesia associated with different countries' trade policiesfinds that reform in other countries leads to a reduction inpoverty in Indonesia but that liberalization of Indonesia'strade policies leads to an increase. The method used here canbe readily extended to any of the other 13 countries in thesample.     

Heterogeneity and Government revenues: Higher taxes at the top?

How effective is a more progressive tax scheme in raising revenues? We answer this question in a life-cycle economy with heterogeneity across households and endogenous labor supply. Our findings show that a tilt of the U.S. income tax schedule towards high earners leads to small increases in revenue. Maximal revenue in the long run is only 6.8% higher than in our benchmark – about 0.8% of initial GDP – while revenues from all sources increase by just about 0.6%. Our conclusions are that policy recommendations of this sort are misguided if the aim is to exclusively raise government revenue.     

Vested interests and technology adoption

The asymmetric ability of different interest groups to exclude non-members and the concentrated benefits and diffused costs of policies favoring vested interests matters for technology adoption. We analyze a political economy model where coalitions of workers in many small industries lobby government for a prohibition on the adoption of superior technologies. For reasonable parameter values, the “smallness” of industry lobbies leads to barriers to the adoption of technologies that would make all workers more productive. Higher government corruption can lead to lower levels of TFP and per capita output. The model can generate TFP growth cycles.     

Optimal International Taxation and Growth Rate Convergence: Tax Competition vs. Coordination

Optimal international taxation and its implications for convergence in long run income growth rates are analyzed in the context of an endogenously growing world economy with perfect capital mobility. Under tax competition (i) the residence principle will maximize national welfare; (ii) the optimal long run tax rate on capital incomes from various sources will be zero in all countries; and (iii) long term per capita income growth rates will be equalized across countries. Under tax coordination, (i) becomes irrelevant while (ii) and (iii) will continue to hold. In other words, optimal tax policies are growth-equalizing with and without international policy coordination. This revised version was published online in July 2006 with corrections to the Cover Date.     

Politics and economics in weak and strong states

While much research in political economy points out the benefits of “limited government,” political scientists have long emphasized the problems created in many less-developed nations by “weak states,” which lack the power to tax and regulate the economy and to withstand the political and social challenges from non-state actors. I construct a model in which the state apparatus is controlled by a self-interested ruler, who tries to divert resources for his own consumption, but who can also invest in socially productive public goods. Both weak and strong states create distortions. When the state is excessively strong, the ruler imposes such high taxes that economic activity is stifled. When the state is excessively weak, the ruler anticipates that he will not be able to extract rents in the future and underinvests in public goods. I show that the same conclusion applies in the analysis of both the economic power of the state (i.e., its ability to raise taxes) and its political power (i.e., its ability to remain entrenched from the citizens). I also discuss how under certain circumstances a different type of equilibrium, which I refer to as “consensually strong state equilibrium,” can emerge whereby the state is politically weak but is allowed to impose high taxes as long as a sufficient fraction of the proceeds are invested in public goods. The consensually strong state might best correspond to the state in OECD countries where taxes are high despite significant control by the society over the government.     

个人所得税、城镇居民收入与消费关系实证研究

运用动态计量方法对个人所得税和城镇居民收入对城镇居民消费的影响进行的实证分析表明:长期来看收入是影响城镇居民消费行为的主要因素,但由于平滑消费倾向、收支预期的不确定性,在短期城镇居民收入增加对消费的促进作用较小;在现阶段,由于个税相对规模、征收范围、征收率、纳税方式的制约,个人所得税并未真正成为制约城镇居民消费的因素;在长期城镇居民消费表现出棘轮效应。     

我国油气资源税由从量计征改为从价计征的政策效应——基于双重差分法的计量分析

基于双重差分法,对西部地区油气资源税由从量计征改为从价计证的政策效果进行评估,以单位产值能耗、污染排放量和人均资源税收入作为政策效果变量,实证研究表明,油气从价税改革促使西部地区单位产出能耗相对于样本均值下降了7.90~8.55个百分点,污染排放量减少约1556吨,人均资源税收入相对于样本均值增加了2.74~3.03个百分点,通过采用不同处理方法进行稳健性检验后,以上结论仍然成立。     

US Fiscal Sustainability and the Causality Relationship between Government Expenditures and Revenues: A New Approach Based on Quantile Cointegration

This paper first aims to reinvestigate the issue of US fiscal sustainability by using the quantile cointegration approach proposed by Xiao (2009 and 2012). Our empirical evidence indicates a quantile‐dependent cointegrating relationship between government expenditures and revenues. In addition, this paper examines the long‐run causality relationship between expenditures and revenues by using the vector error‐correction (VEC) model with coefficients based on the different quantiles. Findings from the long‐run Granger‐causality analyses support the spend‐and‐tax hypothesis. Our investigation suggests that the government should show more discretion in increasing expenditures in the long run. Moreover, budget deficit reduction can only be achieved through reductions in government expenditures.     

Government Ownership of Banks

We assemble data on government ownership of banks around the world. The data show that such ownership is large and pervasive, and higher in countries with low levels of per capita income, backward financial systems, interventionist and inefficient governments, and poor protection of property rights. Higher government ownership of banks in 1970 is associated with slower subsequent financial development and lower growth of per capita income and productivity. This evidence supports "political" theories of the effects of government ownership of firms.     

Is Government Expenditure Volatility Harmful for Growth? A Cross‐Country Analysis*

The aim of the paper is to analyse the relationship between government expenditure volatility and long‐run growth. Using cross‐country panel data from 1970 to 2000, the paper finds that countries with higher government expenditure business‐cycle volatility have lower growth, even after controlling for other country‐specific growth correlates such as investment, government expenditure, human capital, population growth and output volatility. This relation is robust to different measures of business cycles. Moreover, considering different subsamples, the paper finds that while government volatility significantly affects long‐run growth for developing countries, it has a small effect for OECD countries.