TY - JOUR
T1 - Comment on
T2 - "Macroeconomic consequences of terror: Theory and the case of Israel"
AU - Cukierman, Alex
PY - 2004/7
Y1 - 2004/7
N2 - This paper is a pioneering attempt to take a systematic look at the effects of terror in Israel. It presents a theoretical analysis of the macroeconomic consequences of terror followed by empirical evidence for Israel. The theory part utilizes a steady state version of Blanchard (1985) finite lives model in which each individual faces a constant probability of death at every moment. The empirical part is, for the most part, based on level and first difference VAR's between GNP, non durable consumption, investment and exports (all in per capita terms) augmented by a proxy for the intensity of terror and a measure of the real rate of interest. The theory is used as a broad guiding device to qualitatively guide the empirical work rather than for providing a precise structure to be estimated. The main implications of the theory are that, by raising the probability of death, an increase in terror reduces investment, production and consumption. Essentially, by increasing the probability of death d, an increase in terror activity reduces the incentive to save and with it the steady state level of capital, production and consumption. In parallel the increase in d raises the interest rate and reduces total wealth. The paper augments Blanchard's model with a welfare maximizing government that responds to the increase in terror activity by raising government expenditures designed to partially offset its impact on the probability of death. The main results of the empirical part are that, in Israel, the terror variable exerts a negative and significant impact on the macroeconomic variables mentioned above. A counterfactual experiment implies that if terror continues at the level it had been at (between the last quarter of 2002 and the third quarter of 2003) up to the third quarter of 200 then, in comparison to a no terror benchmark, annual GDP per capita is lower by roughly 2 percent per year, non durable consumption per capita is lower by 1 percent per year and the level of investment per capita is lower by 10 percent annually. The paper also contains an empirical analysis of the differential impact of terror on domestic versus foreign tourists. My discussion focusses on possible broader interpretations of the main empirical results of the paper in light of its theoretical model and of the Israeli political and economic scene since the inception of the Oslo peace process in the mid nineties.
AB - This paper is a pioneering attempt to take a systematic look at the effects of terror in Israel. It presents a theoretical analysis of the macroeconomic consequences of terror followed by empirical evidence for Israel. The theory part utilizes a steady state version of Blanchard (1985) finite lives model in which each individual faces a constant probability of death at every moment. The empirical part is, for the most part, based on level and first difference VAR's between GNP, non durable consumption, investment and exports (all in per capita terms) augmented by a proxy for the intensity of terror and a measure of the real rate of interest. The theory is used as a broad guiding device to qualitatively guide the empirical work rather than for providing a precise structure to be estimated. The main implications of the theory are that, by raising the probability of death, an increase in terror reduces investment, production and consumption. Essentially, by increasing the probability of death d, an increase in terror activity reduces the incentive to save and with it the steady state level of capital, production and consumption. In parallel the increase in d raises the interest rate and reduces total wealth. The paper augments Blanchard's model with a welfare maximizing government that responds to the increase in terror activity by raising government expenditures designed to partially offset its impact on the probability of death. The main results of the empirical part are that, in Israel, the terror variable exerts a negative and significant impact on the macroeconomic variables mentioned above. A counterfactual experiment implies that if terror continues at the level it had been at (between the last quarter of 2002 and the third quarter of 2003) up to the third quarter of 200 then, in comparison to a no terror benchmark, annual GDP per capita is lower by roughly 2 percent per year, non durable consumption per capita is lower by 1 percent per year and the level of investment per capita is lower by 10 percent annually. The paper also contains an empirical analysis of the differential impact of terror on domestic versus foreign tourists. My discussion focusses on possible broader interpretations of the main empirical results of the paper in light of its theoretical model and of the Israeli political and economic scene since the inception of the Oslo peace process in the mid nineties.
UR - http://www.scopus.com/inward/record.url?scp=4344627666&partnerID=8YFLogxK
U2 - 10.1016/j.jmoneco.2004.05.002
DO - 10.1016/j.jmoneco.2004.05.002
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AN - SCOPUS:4344627666
SN - 0304-3932
VL - 51
SP - 1003
EP - 1006
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
IS - 5
ER -