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MACROECONOMIC EFFECTS OF TERRORIST SHOCKS IN ISRAEL

This paper estimates a structural vector autoregression to assess the empirical effects of terrorism on output and prices in Israel. Long‐run restrictions are used to interpret the effects in terms of aggregate demand and supply curves. The responses indicate that the immediate effects of terrorism are similar to those associated with a negative demand shock. Such a leftward shift of the aggregate demand curve is consistent with the existence of adverse effects on most components of aggregate expenditure documented in previous empirical studies. The long‐term consequences of terrorism are similar to those related to a negative supply shock. Such a leftward shift of the long‐run aggregate supply curve agrees with adverse effects on the determinants of the potential output, such as contractions of physical capital highlighted in earlier work, as well as reductions of technological innovations and slowdowns of net immigrations, which have not been fully analyzed in the existing empirical literature.