Public Investment in Europe: Evolution and Determinants in perspective*

We describe the evolution of public investment and public capital stocks in Europe over the past three decades. Against this background, we analyse the macroeconomic determinants of public investment, with a special focus on its long‐term trend. We find that public investment has been determined by national income, the stance of budgetary policies and fiscal sustainability considerations. Neither the cost of financing nor the fiscal rules embodied in EMU have had a systemic impact on public investment. The significant downtrend that characterises the evolution of public investment in non‐cohesion countries is chiefly determined by drawn‐out episodes of fiscal consolidation, unrelated to EMU.     

Macro‐Fiscal Volatility and the Composition of Public Spending*

Earlier empirical literature has examined some long‐ and medium‐term aspects of macro‐fiscal volatility while leaving its short‐term fiscal impact unexplored. To help fill that gap, we examine the impact of macro‐fiscal volatility on the composition of public spending. To that end, we analyse a panel of 10 EU countries during 1991–2007. Our results suggest that increases in the volatility of regularly‐collected and cyclical revenues such as the VAT and income taxes tend to tilt the expenditure composition in favour of public investment. In contrast, increases in the volatility of ad hoc taxes such as capital taxes tend to favour public consumption spending, albeit only a little. We interpret such volatility innovations as conveying news to the fiscal policymaker about the underlying economic conditions, with especially regularly‐collected and cyclical taxes prompting short‐term cyclical fine‐tuning.     

Inflation,Employment, and Monetary Policy: Objectives and Outcomes in the UK and U.S. Compared

This paper explores how sensitive is monetary policy to the precise preferences of the central bank over inflation and economic activity. It does so in order to address a puzzle—which is that the U.S. Fed and the Bank of England appear to have quite different objectives and yet have adopted strikingly similar policies in recent years. I use a calibrated model to assess how policy might be sensitive to attaching different weights to inflation, output, and the output gap in central bank objectives. I find that a wide range of weights can give rise to rather similar monetary policies.     

Principles of Tax Design,Public Policy and Beyond: The Ideas of James Mirrlees, 1936–2018

Sir James Mirrlees, co‐recipient of the 1996 Nobel Memorial Prize in Economic Sciences, passed away in August 2018. This article outlines how his work has transformed economists’ understanding of their discipline – from the principles of tax design to the theory of contracts and beyond. By conceiving of policy questions in terms of information asymmetries between governments and taxpayers, Mirrlees demonstrated how to conduct convincing analysis of redistributive objectives together with incentive effects in the design of general tax systems and public policy more broadly. His ability to simplify complex problems in ways that reveal their tractable essence means that his work has yielded insights that have reverberated throughout the discipline. It has also proved highly fruitful for practical policy design.     

A Consulting Giant; a Disgruntled Client: A ‘Failed’ Attempt to Change Management Controls in a Public Sector Organisation

There has been very little research into management consulting interventions in public sector organisations, especially in emerging economies. This paper aims to fill this void by narrating the empirics of a consulting assignment carried out by a large international consulting firm in a Pakistani public sector organisation. The study found that consultants’ recommendations of ‘businesslike’ management controls, such as a modern performance measurement system and a ‘state‐of‐the‐art’ information system, were rejected outright by the client management. Employing a critical realist perspective that focuses on the structural conditions facing both the client and the consultants, and on the strategies adopted by both parties, the study aims to explain the empirics of the case. Through structural and strategic analysis, this paper aims to enhance our understanding of the dynamics of management consulting in public sector organisations, especially in emerging economies.     

Firm Characteristics,Shareholder Sophistication and the Incidence of a ‘First Strike’ Under the ‘Two Strikes’ Rule in Australia

To restrain ‘excessive’ executive pay, Australia introduced new legislation in 2011, commonly known as the ‘two strikes’ rule. This rule has predictable consequences for publicly listed firms and their directors. In this study, we investigate which firm characteristics are associated with the incidence of a ‘first strike’ under the two strikes rule. We find that the incidence of a first strike is positively associated with higher levels of CEO pay, lower ownership concentration, smaller firm size, higher level of institutional ownership and CEO duality. Additional analysis suggests that shareholders fail to differentiate between CEO pay, which is related to the economic characteristics of a firm, and the pay that is not related to firm characteristics. This finding suggests that, unlike US shareholders, Australian shareholders do not appear to have a sophisticated understanding of CEO pay structure.     

Strengthening Post‐Crisis Fiscal Credibility: Fiscal Councils on the Rise – A New Dataset

Institutions that aim to constrain policy discretion in order to promote sound fiscal policies are once again at the forefront of the policy debate. Interest in fiscal councils – independent watchdogs active in the public debate – has grown rapidly in recent years. In this paper, we present the first cross‐country dataset summarising key characteristics of fiscal councils among International Monetary Fund members. The data document a surge in the number of fiscal councils since the 2008–09 economic and financial crisis, and also illustrate that well‐designed fiscal councils are associated with stronger fiscal performance and better macro‐economic and budgetary forecasts. Key features of effective fiscal councils include operational independence from politics, the provision or public assessment of budgetary forecasts, a strong presence in the public debate and the monitoring of compliance with fiscal policy rules.     

Discovering the ‘international’ in accounting and finance

As higher education in accounting and finance moves increasingly in the direction of internationalisation of degree programmes and student populations, this paper reflects on the ways in which contemporary research contributes to the academic community's understanding of the rich potential of evidence available on international convergence and diversity.Reviews of research published in recent years have pointed to strong parochiality in the research questions and data choices of many researchers. This paper looks for a meta-structure of cross-sectional international comparisons across a range of papers at one point in time. Research papers of 2005 are selected from eight journals giving a broad coverage of subject matter.A cultural framework is proposed as a basis for an ethnographic view of the data and findings of empirical research papers. Cultural diversity is found as an explicit discussion in some papers but others are silent or even apologetic for cultural differences.Country-specific studies reveal the potential for comparative studies on a wider geographical basis but the achievement of such an aim will require the academic research community (editors, reviewers and authors) to show flexibility in dealing with smaller data sets and greater uncertainty about the nature of accounting information. Most importantly this review shows the considerable wealth of interest waiting for those who take time to peruse academic journals.     

Taxpayers' Behavioural Responses and Measures of Tax Compliance ‘Gaps’: A Critique and a New Measure

The work of Feldstein (1995 and 1999) has stimulated substantial conceptual and empirical advances in economists' approaches to analysing taxpayers' behavioural responses to changes in tax rates. Meanwhile, a largely independent literature proposing and applying alternative measures of tax compliance has also developed in recent years, which has sought to provide tax agencies with tools to identify the extent of tax non‐compliance as a first step to designing policies to improve compliance. In this context, measures of ‘tax gaps’ – the difference between actual tax collected and the potential tax collection under full compliance with the tax code – have become the primary measures of tax non‐compliance via (legal) avoidance and/or (illegal) evasion. In this paper, we argue that the tax gap as conventionally defined is conceptually flawed because it fails to incorporate behavioural responses by taxpayers. We show that conventional tax gap measures, which ignore the presence of behavioural responses, exaggerate the degree of non‐compliance. This potentially applies both to indirect taxes (such as the ‘VAT gap’) and direct (income) taxes. Further, where these conventional tax gap measures motivate reforms designed to increase the tax compliance rate, they will likely have a tax‐base‐reducing effect and hence generate a smaller increase in realised tax revenues than would be anticipated from the tax gap estimate.     

Monetary policy, ‘dollarization,’ and parallel market exchange rates: The case of the Dominican Republic

Excessive money creation may give rise to inflation tax revenues and to a depreciation of the domestic currency. this in turn leads to a shift away from the domestic currency into a foreign currency (e.g., the US dollar, hence the term ‘dollarization’). From the domestic monetary authority's point of view, ‘dollarization’ is an unwelcomed phenomenomn, thus the monetary authorities will attempt to arrest the ‘dollarization’ phenomenon while maintaining the excessive money growth. This paper develops and tests a model which analyzes the effects of monetary policy on dollarization and the ‘parallel’ market exchange rates.     

Divisia Monetary Aggregates,the Great Ratios,and Classical Money Demand Functions

King et al. ( 1991 ) evaluate the empirical relevance of a class of real business cycle models with permanent productivity shocks by analyzing the stochastic trend properties of postwar U.S. macroeconomic data. They find a common stochastic trend in a three‐variable system that includes output, consumption, and investment, but the explanatory power of the common trend drops significantly when they add money balances and the nominal interest rate. In this paper, we revisit the cointegration tests in the spirit of King et al., using improved monetary aggregates whose construction has been stimulated by the Barnett critique. We show that previous rejections of the balanced growth hypothesis and classical money demand functions can be attributed to mismeasurement of the monetary aggregates.     

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.     

Tax Evasion,Investment Shocks,and the Consumption Puzzle: A DSGE Analysis with Financial Frictions

Recent studies identify Marginal Efficiency of Investment (MEI) shocks as important drivers of the business cycle. However, Dynamic Stochastic General Equilibrium (DSGE) models struggle to explain macroeconomic comovements between consumption and the key real variables after a MEI shock. Moreover, engaging in tax evasion practices is often an answer to financial constraints, which have been recognized as important determinants of cyclical fluctuations as well. We use a medium-scale New Keynesian DSGE model, that combines tax evasion with financial frictions, to simulate a MEI shock. We show that entrepreneurial tax evasion can solve the comovement problem to a fair extent.     

Discussion of ‘Government ownership,corporate governance and tax aggressiveness: evidence from China’

In this article, I discuss several aspects of the paper by Chan et al. (2013). After a brief introduction, the next three sections discuss the hypothesized links between government ownership, corporate governance, institutional factors and tax avoidance in Chan et al. (2013). The fifth section investigates some possible extensions on tax research in the setting of China, while the sixth section concludes this discussion.     

Exchange Rate Pass‐Through,Domestic Competition,and Inflation: Evidence from the 2005–08 Revaluation of the Renminbi

Import competition from China is pervasive in the sense that for many good categories, the competitive environment that U.S. firms face in these markets is strongly driven by the prices of Chinese imports, and so is their pricing decision. This paper quantifies the effect of the government‐controlled appreciation of the Chinese renminbi vis‐à‐vis the USD from 2005 to 2008 on the prices charged by U.S. domestic producers. In a panel spanning the period from 1994 to 2010 and including up to 519 manufacturing sectors, import price changes of Chinese goods pass into U.S. producer prices at an average rate of 0.7, while import price changes that can be traced back to exchange rate movements of other trade partners only have mild effects on U.S. prices. Further analysis points to the importance of trade integration, variable markups, and demand complementarities on the one side, and to the importance of imported intermediate goods on the other side as drivers of these patterns. Simulations incorporating these microeconomic findings reveal that a substantial revaluation of the renminbi would result in a pronounced increase in aggregate U.S. producer price inflation.     

In Old Chicago: Simons,Friedman, and the Development of Monetary‐Policy Rules

This paper examines the different policy rules proposed by Henry Simons, who, beginning in the mid‐1930s, advocated a price‐level stabilization rule, and by Milton Friedman, who, beginning in the late‐1950s, advocated a rule that targeted a constant growth rate of the money supply. Although both rules shared the objective of eliminating the policy uncertainty emanating from discretion, they differed because of the different views of Simons and Friedman about the stability of secular relationships. Simons’ rule relates to modern rules that emphasize the pursuit of price stability as representing optimal monetary policy.     

The role of managerial risk‐taking in the ‘rise and fall’ of the CDS market

Since the innovation of credit default swaps (CDSs) in 1997, the market for CDSs grew dramatically to $62 trillion in 2007 (ISDA 2010). However, this market declined significantly with the onset of the GFC, prompting the question, ‘What lies behind the phenomenal growth and the eventual collapse of the CDS market?’ Using CDS spread data from 319 bank and non‐bank financial institutions across 33 countries over the period 2001–2010, I provide evidence of the determinants that affect risk‐taking by financial institutions, proxied by CDS spreads, and argue within an agency theoretical framework that managerial risk‐taking contributed to the ‘rise and fall’ of the CDS market.     

‘Different from What Has Hitherto Appeared on this Subject’: John Clark,Writing Master and Accomptant, 1738

This paper argues the importance, for the study of accounting history, of collecting evidence of accounting's past and of questioning its conventional wisdoms. It is known that Cronhelm (1818) explained in algebraic terms the mathematical relationship between assets, liabilities and capital reported in a balance sheet. It is also known that the balance sheet equation Assets (A) – Liabilities (L) = Capital (C) became a foundation for teaching bookkeeping as the twentieth century progressed. Current knowledge suggests that, during the first half of the twentieth century, this mathematical approach to teaching accounting gained a foothold in the United States based on the writings of Sprague and Hatfield, and also in Continental Europe. This paper reveals that, in the 1730s in England, John Clark cogently demonstrated an algebraically rooted understanding of the inter‐relationship between double entry bookkeeping and the structure of the balance sheet as exemplified by the above equation. The paper proves that journal‐oriented learning was not the exclusive training method employed by bookkeeping instructors during the early eighteenth century and raises the possibility that other teachers of bookkeeping were providing a more thoughtful education for aspiring clerks, bookkeepers, managers and businessmen than has hitherto been thought the case. This study also shows that accounting technologies do not continuously evolve towards their current state of elaboration, and that it is important for researchers to remain aware of plurality in patterns of accounting change and to be willing to embrace the full range of methodological approaches available for studying accounting phenomena.