Macroeconomic consequences of terrorism in Pakistan

Abstract

The objective of the study examines the macroeconomic consequences of terrorism in Pakistan. The study evaluates the short- and long-run relationship between terrorism and economic factors over a period of 1975–2011. Both objectives have been achieved with the sophisticated econometrics techniques including cointegration theory, Granger causality test and variance decomposition, etc. The result reveals that macroeconomic factors, i.e., population growth, price level, poverty and political instability cause the terrorism incidence in Pakistan. However, income inequality, unemployment and trade openness have no long-run relationship with the terrorism incidence in Pakistan. The study may conclude that, for some how, Pakistan's macroeconomic indicators have significant long-run equilibrium with terrorism incidence. The result of Granger causality indicates that except unemployment, all other macroeconomic indicators have unidirectional causality with terrorism incidence. Unemployment has a bi-directional causality with the terrorism incidence in Pakistan. The results of variance decomposition indicate that there exists statistically significant cointegration among macroeconomic factors and terrorism incidence in Pakistan. Among macroeconomic factors, changes in price level exert the largest influence on terrorism in Pakistan. Contrary, the influence of poverty seems relatively the least contribution level for changes in terrorism incidence in Pakistan.