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Wars as Large Depreciation Shocks

Author

Listed:
  • Stéphane Auray

    () (ENSAI)

  • Aurélien Eyquem

    () (Université de Lyon)

  • Fréderic Jouneau-Sion

    () (Université de Lille)

Abstract

In this paper, we propose a theoretical framework to investigate the impact of conflicts and wars on key macroeconomic aggregates and welfare. Using a panel data with 12 countries from 1875 onwards we first show that consumption drops more than output during conflicts, while the opposite is true during \peaceful" recessions. To handle both cases, we build a variation of a Real Business Cycle model first proposed by Hercowitz and Sampson [1991]. We extend the initial model to account for specific shocks that destroy capital stocks -as conflicts do- by assuming an (exogenously) time{varying depreciation rate of the stock of capital. In addition to these shocks, the model also imbeds generalized TFP shocks capturing standard technological factors as well as the potential effects of human losses on production. The model is able to reproduce the different responses of macroeconomic aggregate to productivity shocks during peaceful periods as well as their responses during conflicts. We describe how these two sources of randomness in the model may be extracted from the available data, and analyze how they interact. We conclude that conflicts have significant and persistent influence on generalized TFP shocks, while the \reverse" effect is not statistically significant. Finally, we show that the welfare costs of conflicts such as World War II are substantially larger than the welfare costs of business cycles usually reported in the literature

Suggested Citation

  • Stéphane Auray & Aurélien Eyquem & Fréderic Jouneau-Sion, 2011. "Wars as Large Depreciation Shocks," Working Papers 2012-30, Center for Research in Economics and Statistics.
  • Handle: RePEc:crs:wpaper:2012-30
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    References listed on IDEAS

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    1. Ambler, Steve & Paquet, Alain, 1994. "Stochastic Depreciation and the Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 101-116, February.
    2. Goel, Rajeev K. & Payne, James E. & Ram, Rati, 2008. "R&D expenditures and U.S. economic growth: A disaggregated approach," Journal of Policy Modeling, Elsevier, vol. 30(2), pages 237-250.
    3. Eduardo Morales-Ramos, 2002. "Defence R&D expenditure: The crowding-out hypothesis," Defence and Peace Economics, Taylor & Francis Journals, vol. 13(5), pages 365-383.
    4. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    5. Steve Ambler & Alain Paquet, 1992. "Stochastic Depreciation and the Business Cycle Puzzle," Cahiers de recherche CREFE / CREFE Working Papers 8, CREFE, Université du Québec à Montréal.
    6. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
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    Cited by:

    1. Auray, Stéphane & Eyquem, Aurélien & Jouneau-Sion, Frédéric, 2014. "Wars and capital destruction," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 224-240.

    More about this item

    Keywords

    War; Military conflicts; Depreciation shocks; Real business cycle model; Random coefficient autroregressive model;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

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