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Cover IMF Working Papers
Fiscal Consequences of Terrorism
Mr. Serhan Cevik and John Ricco

the existing literature focusing on various classical determinants of tax revenue. With regards to terrorism, both indicators—the number of attacks or fatalities scaled by population—are found to be statistically significant at the 5 percent level with a negative effect on the tax-to-GDP ratio. The point coefficient estimate for the number of terrorism-related fatalities per million inhabitants, however, is -0.0004, which is about four times greater than the point coefficient estimate for the number of terrorist attacks. Furthermore, although the marginal economic

Keywords:
WP; terrorism shock; terrorism incidence; country effect; objective of terrorism; system GMM identification assumption; point coefficient estimate
Cover IMF Working Papers
Fiscal Consequences of Terrorism
Mr. Serhan Cevik and John Ricco
This paper provides an empirical analysis of how the frequency and severity of terrorism affect government revenue and expenditure during the period 1970–2013 using a panel dataset on 153 countries. We find that terrorism has only a marginal negative effect on tax revenue performance, after controlling for economic and institutional factors. This effect is also not robust to alternative specifications and empirical strategies. On the other hand, we find strong evidence that terrorism is associated with an increase in military spending as a percent of GDP (and a share of total government expenditure). Our estimations reveal that this impact is greater when terrorist attacks are frequent and result in a large number of fatalities. Empirical findings also support the view that public finances in developing and low-income countries are more vulnerable to terrorism than those in countries that are richer and diversified.
Keywords:
WP; terrorism shock; Terrorism; tax revenue; military spending; impact of terrorism; terrorism indicator; coefficient estimate; terrorism term; terrorism sample; system GMM estimator; Defense spending; Total expenditures; Estimation techniques; Global
Cover IMF Working Papers
Discriminatory Pricing of Over-the-Counter Derivatives
Harald Hau, Peter Hoffmann, Sam Langfield, and Mr. Yannick Timmer
New regulatory data reveal extensive price discrimination against non-financial clients in the FX derivatives market. The client at the 90th percentile pays an effective spread of 0.5%, while the bottom quarter incur transaction costs of less than 0.02%. Consistent with models of search frictions in over-the-counter markets, dealers charge higher spreads to less sophisticated clients. However, price discrimination is eliminated when clients trade through multi-dealer request-for-quote platforms. We also document that dealers extract rents from captive clients and market opacity, but only for contracts negotiated bilaterally with unsophisticated clients.
Keywords:
WP; client sophistication; forward rate; dealer-client relationship; FX market; market structure; Transaction costs; search frictions; information rents; RFQ platforms; sophisticated client; RFQ platform; client order; relationship dealer; information rent; Over-the-counter markets; Public investment and public-private partnerships (PPP); Currency markets; Price adjustments; Securities markets; Global
Cover IMF Working Papers
Discriminatory Pricing of Over-the-Counter Derivatives
Harald Hau, Peter Hoffmann, Sam Langfield, and Mr. Yannick Timmer

of dealer-client relationships according to client sophistication. When we include Sophistication in Column (2), the premium for relationship trades is no longer statistically significant. To explore the client type dependence of the relationship premium, Column (3) interacts the Relationship dummy with Sophistication . The point coefficient estimate of -1.097 is statistically significant at the 1% level, as is the coefficient for Relationship at 3.594. Accordingly, the median client pays a relationship premium of approximately 7.8 pips relative to the

Keywords:
WP; client sophistication; forward rate; dealer-client relationship; FX market; market structure; OTC client; sell order; trade direction; counterparty relationship