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Estimating the economic costs of conflict: An examination of the two-gap estimation model for the case of Nicaragua

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  • Sabrina DiAddario

Abstract

A substantial part of the economic cost of conflict arises from the reduction in potential output consequent upon the sharp decline of foreign exchange availability caused by the destruction of export capacity and the interruption of trade channels. This paper examines the “two-gap” model used by the United Nations to measure the GDP loss from war in the case of Nicaragua. The theoretical limitations of this model are discussed, and the implausibility of the assumptions as to fixed import and consumption coefficients identified. Careful econometric estimation reveals that there is in fact a structural break in the consumption function, the use of which results in a more robust method for estimating the economic cost of conflict, and more figures for the case of Nicaragua.

Suggested Citation

  • Sabrina DiAddario, 1997. "Estimating the economic costs of conflict: An examination of the two-gap estimation model for the case of Nicaragua," Oxford Development Studies, Taylor & Francis Journals, vol. 25(1), pages 123-141.
  • Handle: RePEc:taf:oxdevs:v:25:y:1997:i:1:p:123-141
    DOI: 10.1080/13600819708424125
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    1. repec:fth:oxesaf:93.1 is not listed on IDEAS
    2. Christopher Adam, 1993. "Testing for regime shifts in short-sample African macroeconomic data: a survey of some Monte Carlo evidence," Economics Series Working Papers WPS/1993-01, University of Oxford, Department of Economics.
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    Cited by:

    1. Olaf J. de Groot & Carlos Bozzoli & Tilman Bruck, 2015. "The Global Economic Burden of Violent Conflict," HiCN Working Papers 199, Households in Conflict Network.
    2. Gardeazabal, Javier, 2010. "Methods for Measuring Aggregate Costs of Conflict," DFAEII Working Papers 2010-09, University of the Basque Country - Department of Foundations of Economic Analysis II.
    3. Olaf J. de Groot & Tilman Brück & Carlos Bozzoli, 2009. "How Many Bucks in a Bang: On the Estimation of the Economic Costs of Conflict," Discussion Papers of DIW Berlin 948, DIW Berlin, German Institute for Economic Research.

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