Terrorist Attacks and Strategic Household Consumption

Abstract

This paper utilizes high-frequency individual-level data on financial activities to examine the causal impact of terrorist attacks on household consumption behaviors. We document a significant shift in consumption from debit accounts to credit cards following the attacks. The attack-hit consumers increase their weekly share of credit card spending by 28 basis points compared to the non-attack-hit consumers during the five weeks following the attacks. Consumption shifting is stronger when the impact of the attack is larger. Consistent with a precautionary liquidity demand mechanism, we document a stronger response among individuals with higher liquidity constraints, and a significant increase in liquid financial asset balance. We also observe an increase in both risky and safer investments. Consumption shifting is quick but non-persistent and does not lead to significant long-term impacts on credit card debt or salary income. Overall, our study highlights the real economic impact of uncertainty shocks on micro-level strategic household consumption.

Keywords: Terrorist attacks, household consumption, consumption shifting, economic uncertainty, precautionary liquidity demand, credit cards, bank cards, household finance

JEL Classification: D12, D14, G21, G51