HARD CURRENCIES FOR HARD TIMES. TERROR ATTACKS AND THE CHOICE OF MONETARY ANCHORS

Abstract

As terror’s victims increase, hard currency commitments gain effectiveness in reducing inflation, and central bank independence loses its effectiveness, because terror reduces transparency and the number of veto players in domestic politics. PCSE (Panel‐Corrected Standard Error) estimations of inflation are run on pooled cross‐section time‐series sample of 87 countries from 1975–2005. When the trend level rises to 100 victims annually a currency board reduces inflation by up to 7.5%, and an independent bank raises inflation by up to 8%. When victims exceptionally exceed the trend by 100, a currency board reduces inflation by 2.5%, and an independent bank raises it by 2%.