What is it good for? On the Inflationary Effects of Military Conflicts

Ulrich Eydam and Florian Leupold ()
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Florian Leupold: University of Potsdam

No 65, CEPA Discussion Papers from Center for Economic Policy Analysis

Abstract: Military conflicts and wars affect a country’s development in various dimensions. Rising inflation rates are a potentially important economic effect associated with conflict. High inflation can undermine investment, weigh on private consumption, and threaten macroeconomic stability. Furthermore, these effects are not necessarily restricted to the locality of the conflict, but can also spill over to other countries. Therefore, to understand how conflict affects the economy and to make a more comprehensive assessment of the costs of armed conflict, it is important to take inflationary effects into account. To disentangle the conflict-inflation-nexus and to quantify this relationship, we conduct a panel analysis for 175 countries over the period 1950–2019. To capture indirect inflationary effects, we construct a distance based spillover index. In general, the results of our analysis confirm a statistically significant positive direct association between conflicts and inflation rates. This finding is robust across various model specifications. Moreover, our results indicate that conflict induced inflation is not solely driven by increasing money supply. Furthermore, we document a statistically significant positive indirect association between conflicts and inflation rates in uninvolved countries.

Keywords: inflation; wars; military conflicts; spillover effects; dynamic panel estimation (search for similar items in EconPapers)
JEL-codes: E00 E31 F51 H56 (search for similar items in EconPapers)
Date: 2023-07
New Economics Papers: this item is included in nep-mon
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Journal Article: What is it good for? On the inflationary effects of military conflicts (2024)
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