Macroeconomic Consequences of Terror: Theory and the Case of Israel

Zvi Eckstein () and Daniel Tsiddon

No 4427, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper analyses the effect of terror on the economy. Terror endangers life such that the value of the future relative to the present is reduced. Hence, due to a rise in terror activity, investment goes down, and in the long run income and consumption go down as well. Governments can offset terror by putting tax revenues into the production of security. Facing a tide of terror, a government that acts optimally increases the proportion of output spent on defense, but does not fully offset the tide. Thus, when terror peaks, the long-run equilibrium with an optimizing government is of lower output and welfare. Next, we show that this theory of terror and the economy helps to understand changes in trend and business cycle of the Israeli economy. The estimates show that terror has a large impact on the aggregate economy. Continued terror, at the level of the death toll by about the same size as due to car accidents, is expected to decrease annual consumption per capita by about 5% in 2004. Had Israel not suffered from terror during the last three years, we estimate that output per capita would have been about 10% higher than it is today.

Keywords: Consumption; investment; Security; Terror; Israel (search for similar items in EconPapers)
JEL-codes: E21 H11 H56 (search for similar items in EconPapers)
Date: 2004-06
References: Add references at CitEc
Citations: View citations in EconPapers (254)

Downloads: (external link)
https://cepr.org/publications/DP4427 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Macroeconomic consequences of terror: theory and the case of Israel (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:4427

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP4427

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().