An empirical analysis of terrorism impact on public debt: A dynamic heterogeneous panel approach

Abstract

The increase in the frequency of terrorist attacks and the availability of data has enhanced the interest of economists in analysing this phenomenon and studying its impact on the economy. Besides the loss of lives, terrorism can seriously strain public finance. Indeed, these events promote the increase of national security expenditures which leads either to the reallocation of public resources with a fall in productive investment or to an increase in the sovereign debt. Furthermore, terrorist attacks affect financial markets and lead risk premium escalation, thus increasing government borrowing cost. This paper tries to examine the causal relationship between terrorism and public debt for 19 developed and developing economies, frequently affected by terrorism attacks, for the period of 2002–2017. Due to the presence of cross-sectional dependence in the panel, we employ the Pesaran’s Cross-sectionally augmented Im-Pesaran-Shin test to ascertain unit root properties. The Westerlund cointegration test indicates the presence of a long-run association between terrorism and public debt estimated through the augmented mean group method. We show that an increase in the Global Terrorism Index can impact public debt more in MENA than in Western countries.

Keywords: Terrorism, public debt, cross-section dependence, heterogeneity panel cointegration.