The Effects of Terrorism Risk on Household Savings

Abstract

In view of the increasing intensity of terrorism worldwide, behavioral changes of households become visible. People tend to overvalue terror-related risks such that the subjective probability of terrorism events. Using microeconomic panel data of the elderly population from 13 European countries, this study analyzes the impact of terrorism risk on household savings patterns. Terrorism increases household savings to a significant and economically meaningful degree. Two terror variables – the number of attacks and the number of fatalities – analyze this effect in detail. While the impact of the number of attacks is negative, savings increase with the number of fatalities. We give a potential explanation for this difference. While the results for European countries are consistent, Israel is markedly different from the rest of the sample – an effect likely due to the different political situations in both regions. The reported findings have implications for both fiscal and monetary policy.

Keywords: Terrorism, Terrorism risk, Risk perception, Household savings, Treatment effect

JEL Classification: D14, D91, F52, G11, G51, H56