Informing ex-ante event studies with macro-econometric evidence on the structural and policy impacts of terrorism

In modeling the economic impact of a hypothetical terrorism event, details describing two broad sets of shocks are typically required: (1) Physical impacts on observable variables, e.g., asset damage; and (2) Behavioral impacts on unobservable variables, e.g., investor uncertainty. Assembling shocks related to the physical characteristics of a terrorism event is relatively straightforward, since estimates are either readily available or plausibly inferred. However, assembling shocks describing impacts on agent behavior is more difficult. Values for behavioral variables, e.g., impacts on required rates of return, are typically inferred or estimated by indirect means. Generally, this has been achieved via reference to extraneous literature or ex-ante surveys. How confident can planners be that the impact magnitudes produced by this methodology are plausible? Ex-post econometric studies of terrorism by Blomberg, Hess and Orphanides (2004) yield models for the response of observable economic variables, e.g., real GDP, investment and government expenditure, to terrorism and other forms of conflict. In this article, we use the findings of Blomberg et al. (2004) to determine point estimates for relevant (unobservable) structural variables impacted by terrorism events, using the USAGE 2.0 dynamic CGE model of the U.S.A. [Dixon and Rimmer (2002, 2004)]. This allows us to: (i) explore the relative contributions of implicit structural and policy shifts in the results for observable variables reported in Blomberg et al. (2004); and (ii) compare these implicit structural shocks with assumed structural shocks in earlier ex-ante CGE studies of terrorism.