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Macroeconomic Effects of Terrorist Shocks in Israel

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  • Denis Larocque
  • Geneviève Lincourt
  • Michel Normandin

Abstract

This paper estimates a structural vector autoregression model to assess the dynamic effects of terrorism on output and prices in Israel over the post-1985 period. Long-run restrictions are used to obtain an interpretation of the effects of terrorism in terms of aggregate demand and supply curves. The empirical responses of output and prices suggest that the immediate effects of terrorism are similar to those associated with a negative demand shock. Such leftward shift of the aggregate demand curve is consistent with the adverse effects of terrorism on most components of aggregate expenditure, which have been documented in previous studies. In contrast, the long-term consequences of terrorism are similar to those related to a negative supply shock. Such leftward shift of the long-run aggregate supply curve suggests the potential existence of adverse effects of terrorism on the determinants of potential output, which have not been considered so far.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 0820.

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Date of creation: 2008
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Handle: RePEc:lvl:lacicr:0820

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Keywords: Goods market; output; price; and terrorist indices; structural vector autoregressions; long-run identifying restrictions; dynamic responses and variance decompositions;

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References

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  1. Alberto Abadie, 2004. "Poverty, Political Freedom, and the Roots of Terrorism," NBER Working Papers 10859, National Bureau of Economic Research, Inc.
  2. Eckstein, Zvi & Tsiddon, Daniel, 2004. "Macroeconomic consequences of terror: theory and the case of Israel," Journal of Monetary Economics, Elsevier, vol. 51(5), pages 971-1002, July.
  3. Blomberg, S. Brock & Hess, Gregory D. & Orphanides, Athanasios, 2004. "The macroeconomic consequences of terrorism," Journal of Monetary Economics, Elsevier, vol. 51(5), pages 1007-1032, July.
  4. Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
  5. Knight, Malcolm & Loayza, Norman & Villanueva, Delano, 1996. "The peace dividend : military spending cuts and economic growth," Policy Research Working Paper Series 1577, The World Bank.
  6. Alan B. Krueger & Jitka Maleckova, 2002. "Education, Poverty, Political Violence and Terrorism: Is There a Causal Connection?," Working Papers 203, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
  7. S. Brock Blomberg & Gregory D. Hess, 2006. "How Much Does Violence Tax Trade?," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 599-612, November.
  8. Nitsch, Volker & Schumacher, Dieter, 2004. "Terrorism and international trade: an empirical investigation," European Journal of Political Economy, Elsevier, vol. 20(2), pages 423-433, June.
  9. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
  10. David Fielding, 2003. "Modelling Political Instability and Economic Performance: Israeli Investment during the "Intifada"," Economica, London School of Economics and Political Science, vol. 70(277), pages 159-186, February.
  11. Eldor, Rafi & Melnick, Rafi, 2004. "Financial markets and terrorism," European Journal of Political Economy, Elsevier, vol. 20(2), pages 367-386, June.
  12. Nankervis, John C., 2005. "Computational algorithms for double bootstrap confidence intervals," Computational Statistics & Data Analysis, Elsevier, vol. 49(2), pages 461-475, April.
  13. Gupta, Sanjeev & Clements, Benedict & Bhattacharya, Rina & Chakravarti, Shamit, 2004. "Fiscal consequences of armed conflict and terrorism in low- and middle-income countries," European Journal of Political Economy, Elsevier, vol. 20(2), pages 403-421, June.
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