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.     

The macroeconomic consequences of terrorism

We perform an empirical investigation of the macroeconomic consequences of international terrorism and interactions with alternative forms of collective violence. Our analysis is based on a rich unbalanced panel data set with annual observations on 177 countries from 1968 to 2000, which brings together information from the Penn World Table data set, the ITERATE data set for terrorist events, and data sets of external and internal conflict. We explore these data with cross-sectional and panel growth regression analysis and a structural VAR model. We find that, on average, the incidence of terrorism may have an economically significant negative effect on growth, albeit one that is considerably smaller and less persistent than that associated with either external wars or internal conflict. As well, terrorism is associated with a redirection of economic activity away from investment spending and towards government spending. However, our investigation also suggests important differences both regarding the incidence and the economic consequences of terrorism among different sets of countries. In OECD economies, in particular, terrorist incidents are considerably more frequent than in other nations, but the negative influence of these incidents on growth is smaller.     

Payment system disruptions and the federal reserve following September 11, 2001

The monetary and payment system consequences of the September 11, 2001, terrorist attacks and the Federal Reserve's response are reviewed. Interbank payment disruptions appear to be a central feature of many US banking crises, and interbank payment disruptions seem likely to recur. Federal Reserve credit extension following September 11 succeeded in massively increasing the supply of banks’ balances to satisfy the disruption-induced increase in demand and thereby ameliorate the effects of the shock. Relatively benign banking conditions helped make Fed credit policy manageable. An interbank payment disruption that coincided with less-favorable banking conditions could be more difficult to manage, given current daylight credit policies. Paying interest on reserves would facilitate improvements in daylight credit policy.     

Macroeconomic uncertainty and corporate liquidity: the Indian case

Interest in the uncertainties prevailing at the macroeconomic level has always been well known in economic literature. This article analyses the effect of firm level and macroeconomic uncertainty on the decisions of Indian firms with regard to their optimal cash holdings. Using a dynamic panel data model, the study finds strong support for the hypothesis that Indian firms increase their cash holdings with an increase in either form of uncertainty. Also, results for the sub-samples show that middle-aged and middle-sized firms are most affected by variations in macroeconomic uncertainty.     

Funding a PAYG pension system: the case of Italy

Italy is characterised by a mature pay‐as‐you‐go social security system and by particularly adverse population projections. Given these trends, the social security contribution rate is expected to increase above its current high level. This hinders the development of employer‐provided pension funds and introduces a significant wedge between labour cost and earnings that discourages both labour demand and labour supply. Any proposal to reduce payroll taxes and to reform the system in the direction of partial funding has to cope with the state of Italian public finances. Italy has to comply with the Stability and Growth Pact that imposes constraints on budget deficit and debt trends. Using micro data from the Bank of Italy's Survey of Household Income and Wealth and official population projections, we estimate future employment trends under different demographic and macroeconomic scenarios and compute the cost of the transition. We show that it would be substantially reduced if positive effects on employment were induced by the payroll tax reduction.     

The impact of audit committee expertise on auditor resources: the case of Israel

Review of Quantitative Finance and Accounting - We investigate the association between internal audit resources and both audit committee financial expertise and independence using hand-collected...     

The temporal nature of legitimation: the case of IFRS8

Legitimation can operate on an episodic or continual basis [Suchman, M.C. (1995). Managing legitimacy: Strategic and institutional approaches. Academy of Management Review, 20(3), 571–610]. We examine the temporal legitimation of the International Accounting Standards Board (IASB)’s actions during the adoption and review of International Financial Reporting Standard (IFRS) 8 ‘Operating Segments’. We conceptualise the controversy surrounding IFRS8 as an episode when the IASB sought segmental reporting convergence with the US standard, Statement of Financial Accounting Standard 131. Interpreting evidence from 15 (20) semi-structured interviews undertaken in 2009 (2011), before (after) entities reported under IFRS8, reveals its adoption precipitated an episodic legitimacy threat from selected audiences to the actions of the IASB. We discuss the IASB's attempt to influence legitimation for this episode through commitment to a post-implementation review [IFRS Foundation. (2011). Post implementation reviews: Plan for developing the framework for conducting post-implementation reviews. IASB Board meeting February 2011. Retrieved July 27, 2011, from http://www.ifrs.org/NR/rdonlyres/3E1502E4-F1E8-4907-838B-FFB20C7268ED/0/PIR02111st2ndb04obs.pdf] of IFRS8. Interpreting legitimacy concerns across diverse audiences about specific actions of the IASB (the introduction of IFRS8) enables us to draw conclusions about the resilience of the IASB as a standard setting organisation, in itself.     

Compliance costs for personal income tax in a transition country: the case of Slovenia

The evaluation of taxpayers' compliance costs has grown in significance within tax system research over the last 15 years. In 2001, two surveys of VAT and personal income taxpayers were conducted in Slovenia to evaluate compliance costs for the 2000 fiscal year. This paper presents the results of research into compliance costs for personal income tax in Slovenia. The results show that compliance costs for personal income tax are relatively low, primarily because most taxpayers consider filing their tax declaration to be a simple procedure, which means that consultancy costs are low.     

The Role of the Personal Tax System in Old‐Age Support: A Survey of 15 Countries

This paper examines the tax treatment of pensioners in 15 industrialised countries. Using a standard methodology, it calculates the average and marginal tax rates of older people and compares them with those of people of working age. These are then combined with a model of pension entitlements in different countries. This shows that tax differentials play an important role in old‐age support. We discuss the appropriate way for the tax system to support pensioners and the implications for the tax treatment of private pensions.     

Systematic risk and the theory of the firm: A reexamination

A recent microeconomic model of the determinants of equity betas (Subrahmanyam and Thomadakis 1980) is generalized by including risky human capital in the market portfolio and allowing a general covariance structure between the model's sources of uncertainty. This provides an explanation of the ambiguous effect of operating leverage on beta by viewing human capital and equity contributors as risk sharers in the firm's output risk. This explanation may help to clarify the apparent conflict with the previous literature. The relationship between systematic risk and monopoly power is rederived and shown to depend upon a plausible condition on the correlation between wage rate and price uncertainty. Finally, the public policy implications of this analysis are presented.     

What Drives Fiscal Decentralisation? Further Assessing the Role of Income*

This paper investigates the determinants of fiscal decentralisation, focusing in particular on the impact of the level of income on the level of fiscal decentralisation. Various measures of fiscal decentralisation, several of them novel in this context, are employed in a cross‐country econometric model to test established and more recent hypotheses. Paying careful attention to variable measurement, model specification and sample coverage, the results suggest that there are significant relationships between fiscal decentralisation and income, as well as a range of other factors. However, these relationships may be more complicated than previously reported. For the entire large sample of countries, and for the OECD subsample, a positive relationship between income and decentralisation is found. This corroborates the results found in earlier studies. However, for the middle‐ and lower‐income nations, higher income is found to be associated with less decentralisation.     

Beyond Sharpe ratio: Optimal asset allocation using different performance ratios

As the assumption of normality in return distributions is relaxed, classic Sharpe ratio and its descendants become questionable tools for constructing optimal portfolios. In order to overcome the problem, asymmetrical parameter-dependent performance ratios have been recently proposed in the literature. The aim of this note is to develop an integrated decision aid system for asset allocation based on a toolkit of eleven performance ratios. A multi-period portfolio optimization up covering a fixed horizon is set up: at first, bootstrapping of asset return distributions is assessed to recover all ratios calculations; at second, optimal rebalanced-weights are achieved; at third, optimal final wealth is simulated for each ratios. Eventually, we make a robustness test on the best performance ratios. Empirical simulations confirm the weakness in forecasting of Sharpe ratio, whereas asymmetrical parameter-dependent ratios, such as the Generalized Rachev, Sortino–Satchell and Farinelli–Tibiletti ratios show satisfactorily robustness.     

Macroeconomic risk and the cross-section of stock returns

We develop a conditional version of the consumption capital asset pricing model (CCAPM) using the conditioning variable from the cointegrating relation among macroeconomic variables (dividend yield, term spread, default spread, and short-term interest rate). Our conditioning variable has a strong power to predict market excess returns in the presence of competing predictive variables. In addition, our conditional CCAPM performs approximately as well as Fama and French’s (1993) three-factor model in explaining the cross-section of the Fama and French 25 size and book-to-market sorted portfolios. Our specification shows that value stocks are riskier than growth stocks in bad times, supporting the risk-based story.     

Macroeconomic interdependence and the international role of the dollar

The U.S. dollar holds a dominant place in the invoicing of international trade. In addition to a direct role for most U.S. exports and imports, it plays a global role for trade flows outside the United States. Using a simple center-periphery model, we show that this global role magnifies the exposure of periphery countries to the U.S.'s monetary policy even when trade flows with the U.S. are limited. This generates gains from coordinated monetary policy, as U.S. policy leads to inefficient movements in intra-periphery relative prices. Despite this inefficiency, flexible exchange rates remain valuable.     

Uncovering the US term premium: An alternative route

The estimates of the US term premium crucially depend upon the ex-ante decision on whether the short-term rate is either an I(0) or an I(1) process. In this paper we estimate a fractionally integrated (I(d)) model which simultaneously determines both the order of integration of the short-term rate and the associated term premium. We show that the term premium experienced a sharp increase from essentially zero in mid-2007 to almost 3% in 2009. We also show that unemployment and term premium dynamics exhibit a very significant positive co-movement.     

Currency competition: A partial vindication of Hayek

This paper establishes the existence of equilibria for environments in which outside money is issued competitively. Such equilibria are typically believed not to exist because of a classic overissue problem: if money is valued in equilibrium, an issuer produces money until its value is driven to zero. By backward induction, money cannot have value in the first place. This paper shows that overissuance is not a problem if agents believe that if an issuer produces more than some threshold number of notes, then only those notes issued up to the threshold will be valued; additional notes will be worthless. This result is very general, applying to any monetary economy in which equilibria with and without valued money exist if the money supply is finite. The paper also compares the allocation achieved by a monopolist to that achieved with competitive issuance in both a search and an overlapping-generations environment. The results depend on the environment considered, but two general conclusions arise. First, it is ambiguous whether competitive issuers can achieve a more desirable allocation than a monopolist. Second, with competitive issuance, a licensing agency can always improve on pure laissez-faire and achieve the efficient allocation in the long run.     

Economic consequences of mandatory GAAP changes: The case of SFAS No. 158

This study examines management's reaction to the SFAS No. 158 requirement to recognize previously disclosed post-retirement benefit obligations on the balance sheet. The results indicate that managers attempted to mitigate the impact of the standard by increasing the assumed pension discount rate in subsequent periods. Further, the discount rate choice was related to the magnitude of the SFAS No. 158 balance sheet adjustment. Specifically, firms with larger required liability adjustments and more volatile pension assets and obligations were more likely to increase their discount rates. The findings have important implications for research regarding the economic consequences of accounting regulations and in particular the debate surrounding recognition versus disclosure since they indicate that managers react to the relocation of information from the financial statement footnotes to the balance sheet.     

Privatization,coordination and agency costs: The case for participation in Eastern Europe

In the paper, the interdependency between privatization and the growth of a new private sector is examined. While the dismantling of the omnipotent economic role of the state is a sine qua non for massive private investment, a vigorous private sector is needed to reduce unemployment and thus make further privatization possible. Since privatization is a lengthy process associated with a medium-term goal, while getting private investment started is important at the very beginning of the transition, this linkage constitutes a serious dilemma for the transformation. Multiple expectational equilibria arise and appropriate beliefs are crucial for the success of the reforms. Voucher schemes are shown to reduce agency costs of private investment and in this way may help to ensure coordination on the optimistic equilibrium.     

Macroeconomic Variables and the Housing Market in Turkey

After important policy changes in 1980, Turkey's trade expanded considerably. Although interindustry trade remained predominant, intraindustry trade (IIT) increased substantially. This paper investigates whether the increase in IIT contributed to reducing adjustment costs due to trade expansion. We undertook an econometric approach and considered three-digit International Standard Industry Classification classified data. We used a model developed by Brülhart and Thorpe (2000) for Malaysia, both in static and dynamic forms. Our static results indicate that, if there is any contribution that IIT makes to adjustments in the manufacturing industries of Turkey, it is either nonexistent, if measured by changes in the Grubel—Lloyd index, or in the opposite direction, if measured by the marginal IIT index (A). The dynamic results are somewhat more encouraging, in that the coefficients of the lagged A and Grubel—Lloyd indexes are negative and significant when three yearly changes are considered, but the overall results are not sufficient to conclude that the structural adjustment hypothesis holds for Turkey.     

Macroeconomic releases and the interest rate term structure

We extract two systematic economic factors from a wide array of noisy and sparsely observed macroeconomic releases, and link the dynamics and market prices of the two factors to the interest rate term structure. The two factors predict 77.9–82.1% of the daily variation in LIBOR and swap rates from one month to 10 years. Shocks on inflation-related releases have large, positive impacts on interest rates of all maturities, leading to parallel shifts of the yield curve, but shocks on output-related releases have larger impacts on the short rate than on the long rate, thus generating a slope effect.