The immediate impactofterrorism, seen so graphically in pictures of mourning families and twisted metal, represent only one side of their cost; the wider loss of revenue and investment can devastate a local economy and undermine the financial stability of a country, or even a region. And on top of the direct and indirect costs of terrorist attacks are the costs incurred in trying to prevent them. Whether immediate and local, such as the reinforcement of security at key installations, or longer term and broader, such as the implementation of regulations
The terrorist attacks that have occurred in the past few years around the world have raised international awareness of the danger of terrorism and its complex repercussions on the financial markets. This paper explores the ways in which financial markets reacted to the attacks and the authorities' responses. Well-functioning financial markets, bolstered by the prompt and effective reaction of the relevant authorities, were generally efficient in absorbing shocks stemming from terrorist attacks. The paper discusses market and regulatory responses to the terrorist attacks and the elements that should be strengthened so as to further enhance the resilience of financial markets to terrorism.
to backup sites and effectively resume their activity instantly or within days. The prompt intervention of the Federal Reserve in cooperation with other authorities also resolved the liquidity shortage and managed to maintain business and consumer confidence in the United States and abroad.
Further evidence on the impactofterrorism on financial markets is offered by a number of recent studies, confirming the observations above. Chen and Siems (2004) attempt to statistically test the significance of the September 11 attacks on global capital markets by
This paper provides an empirical analysis of how the frequency and severity of terrorism affect government revenue and expenditure during the period 1970–2013 using a panel dataset on 153 countries. We find that terrorism has only a marginal negative effect on tax revenue performance, after controlling for economic and institutional factors. This effect is also not robust to alternative specifications and empirical strategies. On the other hand, we find strong evidence that terrorism is associated with an increase in military spending as a percent of GDP (and a share of total government expenditure). Our estimations reveal that this impact is greater when terrorist attacks are frequent and result in a large number of fatalities. Empirical findings also support the view that public finances in developing and low-income countries are more vulnerable to terrorism than those in countries that are richer and diversified.
The immediate impact of terrorism, seen so graphically in pictures of mourning families and twisted metal, represent only one side of their cost; the wider loss of revenue and investment can devastate a local economy and undermine the financial stability of a country, or even a region. And on top of the direct and indirect costs of terrorist attacks are the costs incurred in trying to prevent them. Whether immediate and local, such as the reinforcement of security at key installations, or longer term and broader, such as the implementation of regulations designed to attack the financing of terrorism, these costs add considerably to the overall financial impact of terrorism.
Front Matter Page Fiscal Affairs Department
II. Terrorism and Economy: What Do We Know?
III. Data and Descriptive Statistics
IV. Econometric Model and Estimation Results
V. Further Robustness Checks
1. Terrorism Across the World
1. Determinants of Tax Revenue (Percent of GDP)
2. Determinants of Military Spending (Percent of GDP)
3. Heterogeneity in Terrorism Incidence
5. ImpactofTerrorism in Developing and Low-Income Countries
6. Alternative Definitions
consumption, investment, and growth through changes in risk perceptions and utilization of resources is challenging to pinpoint with a reasonable degree of precision. There is a growing literature on the casual relationship between terrorism and economic growth, but scarce research looking at the impactofterrorism on public finances. Accordingly, the objective of this paper is to develop a better understanding of the fiscal dimension of terrorism by empirically exploring the discernible consequences for tax revenue performance and the composition of government spending in
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Subhayu Bandyopadhyay, Todd Sandler, and Javed Younas
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