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The Curse of Conflict: understanding the effect of terrorism on fiscal volatility

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  • Urbain Thierry Yogo

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper investigates the effect of terrorism on fiscal policy volatility in developing countries. Using panel data analysis of 66 countries from 1970 to 2012, we find that an increase in the number of terrorist incidents raises the volatility of the discretionary component of fiscal policy. In addition, the analysis shows that investment is more responsive to terrorist attacks than consumption. We then turn to the role played by fiscal rules which appears to reduce the effect of terrorism on fiscal policy volatility. Our results are robust to reverse causality, endogeneity bias and the presence of various controls. This paper complements and extends the previous literature by providing the evidence that terrorism substantially increases the uncertainty surrounding the conduct of fiscal policy in developing countries.

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  • Urbain Thierry Yogo, 2016. "The Curse of Conflict: understanding the effect of terrorism on fiscal volatility," Working Papers hal-04141590, HAL.
    • Handle: RePEc:hal:wpaper:hal-04141590
    Note: View the original document on HAL open archive server: https://hal.science/hal-04141590
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    References listed on IDEAS

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    1. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October.
    2. Kis-Katos, Krisztina & Liebert, Helge & Schulze, Günther G., 2011. "On the origin of domestic and international terrorism," European Journal of Political Economy, Elsevier, vol. 27(S1), pages 17-36.
    3. Luca Agnello & Ricardo M. Sousa, 2014. "The Determinants of the Volatility of Fiscal Policy Discretion," Fiscal Studies, Institute for Fiscal Studies, vol. 35, pages 91-115, March.
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