TRADE OPENNESS: AN AUSTRALIAN PERSPECTIVE

Australia's external trade is relatively low compared with the size of its economy. Indeed, Australia's openness ratio (exports plus imports as a proportion of GDP) in 2002 was the third-lowest among the 30 OECD countries. This paper seeks to understand Australia's low openness by analysing the empirical determinants of aggregate country trade. We present an equation for country openness which explains a substantial amount of the cross-country variation. The most important explanators of openness are population and a measure of distance to potential trade partners. Countries with larger populations trade less, as do countries that are relatively more remote. Furthermore, after controlling for trade policy there is little evidence of a positive correlation between openness and economic development. The openness equation suggests that Australia's level of trade is relatively close to what would be expected. The most important factors in explaining Australia's low openness ratio are its large geographic size and distance to the rest of the world.     

THE RISK PREMIUM FOR EQUITY: IMPLICATIONS FOR RESOURCE ALLOCATION,WELFARE AND POLICY*

Analysis of the equity premium puzzle has focused on private sector capital markets. The object of this paper is to consider the welfare and policy implications of each of the broad classes of explanations of the equity premium puzzle. As would be expected, the greater the deviation from the first‐best outcome implied by a given explanation of the equity premium puzzle, the more interventionist are the implied policy conclusions. Nevertheless, even explanations of the equity premium puzzle consistent with a general consumption‐based asset pricing model have important welfare and policy implications.     

Privatization Policies and Public Enterprise: A Survey*

This paper surveys and analyzes the economic literature on ‘privatization’ policies, restricting coverage to policies designed to improve the operating efficiency of public sector enterprises through increased exposure to competitive market forces. These include asset sales, liberalization (or deregulation) and franchising. The objectives, incentives and constraints of public and private enterprises are examined, and evidence on their comparative performance is analyzed. Public sector revenue effects from asset sale are also explored. On the basis of these considerations, the paper concludes that liberalization is an important ingredient in any policy package designed to improve the operating efficiency of public sector enterprises. Asset sale may enhance the beneficial impact of deregulation but asset sale in the absence of deregulation is unlikely to improve efficiency, and may introduce additional market distortions. Franchising is seen as an appropriate mechanism for privatization when the market is inherently monopolistic and when the government desires to retain control over output and/or price.     

Subordinated Market Index Models: A Comparison

The paper compares various processes subordinated to the Wiener process tomodel the leptokurtic characteristics of index returns. Empirical analysisis performed on the Dow Jones and Nikkei 225 indexes. A good model to capturethe typical tail behaviour of these indexes turns out to be a long Studentt distributed one.     

Tax Law Improvement in Australia and the UK: The Need for a Strategy for Simplification

In both Australia and the UK, programmes are under way to simplify tax legislation by rewriting it. This paper demonstrates that tax simplification is a complicated concept and concludes that sustainable improvement is unlikely to be achieved if reform is limited only to linguistic changes. Tax law is complicated because there are powerful pressures that tend to increase the complexity of modern tax systems and these should also be considered in any simplification programme. In addition, tax simplification may be promoted by the greater use of purposive legislation — that is, legislation drafted in terms of general principles rather than much more comprehensive legislation designed to deal with every likely possibility. The paper examines the progress of the Australian Tax Law Improvement Project and argues that what is needed is a strategy for tax simplification that is incorporated into the process of generating tax policy itself. JEL classification: H20.     

Dutch Auction Repurchases: An Analysis of Shareholder Heterogeneity

This paper documents that firms face upward-sloping supply curves when they repurchase shares in a Dutch auction, and it analyzes the market reaction to these offers. The announcement price increase is highly correlated with the ultimate repurchase premium. Prices decline at expiration only for pro-rated offers. The cumulative return is positive and highly correlated with the repurchase premium, excepting pro-rated offers. Much of this price increase is consistent with movement along an upward-sloping supply curve. Trading volume around the Dutch auction parallels fixed-price repurchases. Supply elasticity is larger for firms with large trading volume, firms included in the S&P 500 Index, and takeover targets.     

External Constraints on Monetary Policy and the Financial Accelerator

We develop a small open economy macroeconomic model where financial conditions influence aggregate behavior. Our goal is to explore the connection between the exchange rate regime and financial distress. We first show that a calibrated version of the model captures well the behavior of the Korean economy during its financial crisis period of 1997–98. In particular, the model accounts for the sharp increase in lending rates and the large drop in output, employment, investment, and measured productivity. The financial market frictions play an important role, further, explaining roughly half the decline in overall economic activity. We then perform some counterfactual exercises to illustrate how the fixed exchange rate regime likely exacerbated the crisis by tying the hands of monetary policy.