Macroeconomic Effects of Terrorist Shocks in Israel
CIRPEE Working Paper 08-20
25 Pages Posted: 18 Sep 2008
Date Written: September, 16 2008
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.
Keywords: Goods market, output, price, and terrorist indices, structural vector autoregressions, long-run identifying restrictions, dynamic responses and variance decompositions
JEL Classification: C32, E31, E32
Suggested Citation: Suggested Citation