Macroeconomic Effects of Terrorist Shocks in Israel

CIRPEE Working Paper 08-20

25 Pages Posted: 18 Sep 2008

See all articles by Denis Larocque

Denis Larocque

HEC Montreal - Department of Management Sciences

Genevieve Lincourt

affiliation not provided to SSRN

Michel Normandin

HEC Montreal - Institute of Applied Economics

Date Written: September, 16 2008

Abstract

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

Larocque, Denis and Lincourt, Genevieve and Normandin, Michel, Macroeconomic Effects of Terrorist Shocks in Israel (September, 16 2008). CIRPEE Working Paper 08-20, Available at SSRN: https://ssrn.com/abstract=1268959 or http://dx.doi.org/10.2139/ssrn.1268959

Denis Larocque

HEC Montreal - Department of Management Sciences ( email )

Montreal, Quebec H3T 2A7
Canada

Genevieve Lincourt

affiliation not provided to SSRN ( email )

Michel Normandin (Contact Author)

HEC Montreal - Institute of Applied Economics ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

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