Macroeconomic Consequences of Terror: Theory and the Case of Israel
This Paper analyses the effect of terror on the economy. Terror endangers life such that the value of the future relative to the present is reduced. Hence, due to a rise in terror activity, investment goes down, and in the long run income and consumption go down as well. Governments can offset terror by putting tax revenues into the production of security. Facing a tide of terror, a government that acts optimally increases the proportion of output spent on defense, but does not fully offset the tide. Thus, when terror peaks, the long-run equilibrium with an optimizing government is of lower output and welfare. Next, we show that this theory of terror and the economy helps to understand changes in trend and business cycle of the Israeli economy. The estimates show that terror has a large impact on the aggregate economy. Continued terror, at the level of the death toll by about the same size as due to car accidents, is expected to decrease annual consumption per capita by about 5% in 2004. Had Israel not suffered from terror during the last three years, we estimate that output per capita would have been about 10% higher than it is today.
|Date of creation:||Jun 2004|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Feldstein, Martin & Horioka, Charles, 1980.
"Domestic Saving and International Capital Flows,"
Royal Economic Society, vol. 90(358), pages 314-329, June.
- Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
- Manuel Trajtenberg, 2003. "Defense R&D Policy in the Anti-terrorist Era," NBER Working Papers 9725, National Bureau of Economic Research, Inc.
- Slemrod, Joel, 1990. "Fear of Nuclear War and Intercountry Differences in the Rate of Saving," Economic Inquiry, Western Economic Association International, vol. 28(4), pages 647-657, October.
- Joel Slemrod, 1988. "Fear of Nuclear War and Intercountry Differences in the Rate of Saving," NBER Working Papers 2801, National Bureau of Economic Research, Inc.
- Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:4427. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.