The Curse of Conflict: understanding the effect of terrorism on fiscal volatility

Thierry Yogo ()

No 2016-20, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: This paper investigates the effect of terrorism on fiscal policy volatility in developing countries. Using panel data analysis of 66 countries from 1970 to 2012, we find that an increase in the number of terrorist incidents raises the volatility of the discretionary component of fiscal policy. In addition, the analysis shows that investment is more responsive to terrorist attacks than consumption. We then turn to the role played by fiscal rules which appears to reduce the effect of terrorism on fiscal policy volatility. Our results are robust to reverse causality, endogeneity bias and the presence of various controls. This paper complements and extends the previous literature by providing the evidence that terrorism substantially increases the uncertainty surrounding the conduct of fiscal policy in developing countries.

Keywords: Fiscal policy; Terrorism; Fiscal rules (search for similar items in EconPapers)
JEL-codes: D74 E60 H30 O11 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2016-20

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