TERRORIST THREATS AND TRANSITIONAL DYNAMICS IN AN OVERLAPPING GENERATIONS MODEL

Jhy-yuan Shieh, Jhy-Hwa Chen, Juin-jen Chang and Ching-chong Lai

Defence and Peace Economics, 2005, vol. 16, issue 6, 415-425

Abstract: This paper incorporates the nature of terrorist threats into the Yarri (1965)-Blanchard (1985) model and uses it to discuss the transitional dynamics of consumption in response to an anticipated terrorist attack. It is shown that if the terrorist attack is pre-announced (and hence anticipated) and the public is fully informed, short-term consumption may misadjust from its long-term level. Before the terrorist attacks actually take place, households may be motivated to increase (rather than decrease) their consumption as a temporary response. This result may explain the temporary phenomenon of the increased consumption of certain types of goods in the period following September 11.

Keywords: Security spending; Terrorist threats; Overlapping generations model; Transitional dynamics (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1080/10242690500115956

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