What is it good for? On the inflationary effects of military conflicts

Abstract

Military conflicts and wars affect the development of a country in various dimensions. Rising inflation rates are a potentially important economic effect associated with conflict. High inflation can undermine investment, weigh on private consumption, and threaten macroeconomic stability. Furthermore, these effects are not necessarily restricted to the locality of the conflict but can also spill over to other countries. Therefore, to understand how conflict affects the economy and to make a more comprehensive assessment of the costs of armed conflict, it is important to take inflationary effects into account. To disentangle the conflict-inflation nexus and to quantify this relationship, we conduct a panel analysis for 151 countries over the period 1950–2019. To capture indirect inflationary effects, we construct a distance-based spillover index. In general, the results of our analysis confirm a statistically significant positive direct association between conflicts and inflation rates. Furthermore, we document a statistically significant positive indirect association between conflicts and inflation rates in uninvolved countries. These findings are robust across various model specifications. Moreover, our results indicate that conflict-induced inflation is not driven solely by the increase in the money supply.