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Terrorism and Fiscal Policy Volatility in Developing Countries: Evidence from cross-country and Panel Data

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  • Urbain Thierry YOGO

Abstract

This paper investigates the effect of terrorism on fiscal policy volatility in developing countries. Using both cross-country and panel data analysis for 66 countries from 1970 to 2012, we find that an increase in the number of terrorist incidents raise the volatility of the discretionary component of fiscal policy. In addition, the analysis shows that fiscal volatility is positively influenced by the volatility of output growth, the consumer price inflation volatility, the degree of fractionalization of both the government and the opposition. The results also show that the volatility is higher is countries of small size and lower in more democratic countries. 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.

Suggested Citation

  • Urbain Thierry YOGO, 2015. "Terrorism and Fiscal Policy Volatility in Developing Countries: Evidence from cross-country and Panel Data," Working Papers 201514, CERDI.
  • Handle: RePEc:cdi:wpaper:1693
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    References listed on IDEAS

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    1. António Afonso & Luca Agnello & Davide Furceri, 2010. "Fiscal policy responsiveness, persistence, and discretion," Public Choice, Springer, vol. 145(3), pages 503-530, December.
    2. Marcelo J. Moreira & Brian P. Poi, 2003. "Implementing tests with correct size in the simultaneous equations model," Stata Journal, StataCorp LP, vol. 3(1), pages 57-70, March.
    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.
    4. 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.
    5. Berkowitz, Daniel & Caner, Mehmet & Fang, Ying, 2012. "The validity of instruments revisited," Journal of Econometrics, Elsevier, vol. 166(2), pages 255-266.
    6. 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.
    7. Woo, Jaejoon, 2011. "Growth, income distribution, and fiscal policy volatility," Journal of Development Economics, Elsevier, vol. 96(2), pages 289-313, November.
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    Cited by:

    1. Andrey A. Gnidchenko & Vladimir A. Salnikov, 2015. "Net Comparative Advantage Index: Overcoming the Drawbacks of the Existing Indices," HSE Working papers WP BRP 119/EC/2015, National Research University Higher School of Economics.

    More about this item

    Keywords

    Fiscal policy; Terrorism; Fiscal policy volatility;

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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