Modeling and Estimating the Macroeconomic Consequences of Terrorism

Principal Investigator: 
Performance Period: 
October 2008 to September 2013
Commercialization Status: 
This study continues to provide contributions for our understanding of underlying macroeconomic consequences of terrorism.  This has been a continuation of years on working on projects under this theme.  The study estimates the long run economic growth effects associated with terrorism and includes impacts due to behavioral influences as specified via social capital networks.  To accomplish this task, we extended a panel data set that incorporates the World Bank data on national income and growth, IMF data on financial conditions, RAND and START data on domestic and international terrorism incidents, and data on external and internal conflict.  Using this unique dataset, which spans over 40 years for 180 countries, we examine the dynamic effects of terrorism on economic growth, consumption growth, as well as possible effects on capital accumulation and macroeconomic instability.   The panel dimension of this data is particularly useful as it allows identification of the effects of terrorism on economic activity, growth and stability that may be evident in long-run trends that cannot be detected absent long-horizon cross-country comparisons.  With these added degrees of freedom across the globe, we can then extract the impact on the United States economy.    This project continues to develop a research program to estimate the economic impact of terrorism using a myriad of macroeconometric techniques.  To estimate the long-term impact of terrorism the project will employ cross-sectional estimation, to estimate the short- and medium-term impact of terrorism the project employ dynamic panel and VAR analysis.  To augment these estimates, the project will include estimates from the impact due to psychological and behavioral factors.   This project continues to be of the three modeling and research analyses of CREATE –   “Economic Assessment which includes the estimation of direct and indirect economic impacts and cost-benefit analyses of counter-terrorism options.”  Last year’s project resulted in a macroeconomic-model and data construction of over 16,000 terrorist events over 40 years in the United States and abroad.  In 2009, it provided macroeconomic estimates on the average loss of GDP growth, which aided in a definitive estimate of the cost of 9/11 of $60 billion.  The research was well-received by policy-makers, think-tanks and academia, as the research associated with the funding led to 4 publications and 2 presentations to date.  The work for year 9 augments these earlier estimates by comparing costs over a longer historical context and providing predictions for the longer term future.    In addition, I explored developing new research ideas with a more applied focus.  The purpose of this research is to improve methods for assessing likely targets of terrorism. Our goals are to investigate three economic avenues of terrorism (democratization, globalization, and resource allocation), to better predict when and which countries and organizations would be the most likely sources of terrorism in a Web-Based Global Warning System.  This model can be used to pinpoint likely sources of attack from terrorist groups abroad on American soil (see map above).  Knowledge of probable attacking countries would enable DHS to better protect air and sea ports.  This work builds on efforts to develop threat assessments designed to help DHS optimally allocate resources to stem likely avenues of terrorism.