**4. Discussion**

The ongoing developments in the hydrocarbon discoveries in Israel's Exclusive Economic Zone (EEZ), as well as in the broader region, are taking front stage in the agendas of policy makers, politicians, and corporations. While there is a raging debate over all aspects of policy concerned with the present and future of these valuable resources, there seems to be a growing interest in understanding the magnitude of implications over Israel's economy, environment, and geopolitics. It is clear that NG will play a leading role in the foreseeable future of Israel's energy market. Moreover, its share of the country's economy is growing, influencing the industrial, transportation, and financial sectors among others, as well as macro factors of growth and employment rates.

The possible adverse e ffects of foreign exchange windfalls on the tradable sector have been a recurring theme in the literature on the Dutch disease and the resource curse [16] There are alternative windows through which researchers can ge<sup>t</sup> a view on the issues. Such e ffects can be associated with observable variations in the production structure or data from the balance of trade and payments. This approach is not ye<sup>t</sup> possible to apply for investigating the NG impact on the Israeli economy. Hence, we analyze the impact of recent developments in the NG sector on the Israeli economy through NG-related announcements and the exchange rate fluctuations.

In the investigated time period of the years 2008–2017, major NG reserves were discovered, and fiscal and export policies were adjusted. In addition, the energy flow has changed dramatically, crowding out imported fuels in favor of domestic NG and renewable energy in the supply mix. The share of NG as the core feedstock for electricity increased rapidly. The pipelines to connect the local industry to NG have been built. Contracts for Israeli NG export have been negotiated, and some have already been approved. The announcements reflected these transformations.

We found significant evidence indicating that investors already adjust the profit strategy according to the expectations of the large-scale export of NG. The appreciation of ILS on the day of announcements that related to the prospects of exports and development of the NG fields provides direct evidence for investors' strategy in view of the expected NG export, which will lead to foreign currency inflow and real exchange rate appreciation. Moreover, since the connection of the Tamar gas field in 2013, the announcements regarding NG strengthened the expectations for a future currency appreciation, and brought about a stronger reaction of foreign currency markets.

It may seem that the evidence for local currency appreciation that has occurred in relation to a potential increase in the export of NG supports non-governmental organizations (NGOs)' demand for a larger share of NG to be preserved for future generations. The argumen<sup>t</sup> is that fast NG depletion compromises the possibility for sustainable development. However, economic theory provides another path for sustainable economic development. The Hartwick rule for weak sustainability states that instead of natural resource preservation, the profit from the resource, if invested in the development of alternative energy sources, infrastructure, education, and research, can ensure sustainable development [39].In other words, rather than being used for consumption purposes in the public budget, the governmen<sup>t</sup> take from NG should be transferred to what is known as Sovereign Wealth Fund (SWF). The SWF should be designed not only to implement the Hartwick rule, but also to insulate the public budget from the volatilities of NG prices, and protect the economy from Dutch disease. When invested in foreign financial markets, SWF o ffsets the foreign currency inflow caused by natural resource export and mitigates domestic currency appreciation.

Pursuant to the Sovereign Wealth Fund Law 5774-2014, a fund was established for the managemen<sup>t</sup> of the proceeds that Israel receives from the impost on profits from NG. However, the governmen<sup>t</sup> income from NG has not reached the fund yet, and the political pressure to use most of the revenue to cover public debt is high.

To summarize, the present study has shown that the classic symptom of the Dutch Disease— exchange rate appreciation—is already in place, even though the NG export has not ye<sup>t</sup> reached its expected potential. In terms of policy implications, our research provides insights for policy makers to embark on strategic institutional reforms and develop regulations for e fficient and sustainable natural gas extraction and utilization. Our findings indicate that the development of an optimal strategy for the governmen<sup>t</sup> and the central bank is a key issue. The role of SWF in mitigating the foreign currency inflow is of high importance. Moreover, Israeli policy makers should not overlook lessons learned from the Dutch experience (and that other small developed countries) regarding the managemen<sup>t</sup> of NG windfall. Appendix A: Adaptation of Events study methodology to estimation of abnormal return for exchange rate.

**Author Contributions:** Conceptualization, R.R.P.; Data curation, L.V.; Formal analysis, T.T., L.V. and R.R.P.; Investigation, L.V.; Methodology, T.T.; Validation, T.T.; Writing—original draft, R.R.P., T.T. and L.V.

**Funding:** This research received no external funding.

**Conflicts of Interest:** The authors declare no conflict of interest.

### **Appendix A. Adaptation of Events Study Methodology to Estimation of Abnormal Return for Exchange Rate**

First we calculate *ei*, the average of the daily change in the exchange rate in the estimation window for event *i*, *i* ∈ (−300,−17) when *ei*,*<sup>t</sup>* is defined as the actual daily change in the ILS to USD exchange rate on day *t* of event *i*.

$$
\tilde{c}\_{i} = \frac{1}{284} \sum\_{t=-300}^{-17} c\_{i,t} \tag{A1}
$$

Next we calculate the abnormal return for exchange rate *Aei*,*t*, that represents the difference between the actual exchange rate and the average daily exchange rate calculated in the estimation window on day *t* of event *i*.

$$A e\_{i,t} = e\_{i,t} - \overline{e}\_i \tag{A2}$$

The average abnormal return for real exchange rate *AAet* for the entire sample of events at time *t*, is calculated, where N represents the number of events examined at time t.

$$AAc\_t = \frac{1}{N} \sum\_{i=1}^{N} Ac\_{i,t} \tag{A3}$$

The cumulative average abnormal real exchange rate return *CAAei*,(−16,16) in the event window (−16,16) is calculated as:

$$
\langle \mathcal{C}AA\mathcal{e}\_{i,(-16,16)} = \sum\_{t=-16}^{16} AA\mathcal{e}\_{i,t} \tag{A4}
$$

Most of the customary methods in the literature that use Event Study Methodology utilize t-tests in order to examine the significance of the cumulative abnormal return obtained in the previous section [22,40].

The classic test of Brown and Warner (1985) assumes the following null hypothesis:

$$\text{H0}: AA\varepsilon\_l \sim \text{N}\left(0, \sigma^2\_{\,i}\right) \tag{A5}$$

where *AAei*,*<sup>t</sup>* in our study is the abnormal real exchange rate return in the event window. The estimation of the variance on the event day (σ2*i* ) is based on the data deviations in the event window, when the classic model assumes that the variance in the event window is equivalent to the variance in the estimation window. In order to calculate the standard deviation of the sample:

$$\sigma(AAeN) = \frac{1}{N} \sqrt{\left\{ \sum\_{i=1}^{N} \left[ \frac{1}{K-2} \sum\_{t=1}^{K} \left( Ac\_{i,t} - \overline{Ac\_{i,t}} \right)^2 \right] \right\}} \tag{A6}$$

where *K* is defined as the number of observations during the estimation period, and *Aei*,*<sup>t</sup>* represents the average abnormal exchange rate return during the estimation period.

Therefore, a t-test can be formulated to analyze the average abnormal exchange rate return in the sample of N days as follows:

$$t\_{CAAe\_l} = \frac{\complement\mathcal{CAale\_l}}{\sigma\_{AAe\_l} \times \sqrt{N}}\tag{A7}$$

where *tCAAet* represents a statistical t-test of the average abnormal real exchange rate return during the continuous period. In addition, *CAAet* represents the average abnormal real exchange rate return during the continuous period, *SAAet* represents the standard deviation of the average abnormal return in the estimation window, and N represents the number of days in the subperiod. According to the

results obtained from the t-test for each of the subperiods in the di fferent subgroups, the present research examined whether there is statistically significant abnormal return.
