This study estimates the impact of terror activity on inflation in Pakistan. Considered as one of the most dangerous places in the world, Pakistan is the epicenter of terror activity since September 11, 2001 (9/11). Apart from casualties of innocent people and damage to infrastructure, there are other macroeconomic consequences of terror as well. Terror activity disrupts the supply-chain and influence consumer behavior that has implications for inflation. After developing the terror index (TI) which captures the impact of terror activity in Pakistan, Autoregressive Distributed Lag (ARDL) model is used on monthly data starting from January 2002 to October 2023. This estimation strategy provides both the short-run and long-run coefficients and analyses the long-run relationship between inflation and terror index. Traditional determinants of inflation such as money supply, government borrowing from the central bank, nominal exchange rate and a dummy for massive floods are used as ‘control’ variables in this study to gain improved model fit and address the problem of endogeneity. The results show that the coefficient of terror index is statistically significant both in the short-run and the long-run. A rise in terror activity leads to an increase in inflation. Coefficients of control variables are also statistically significant and in line with economic intuition.

Authors:
Syed Zulqernain Hussain, University of Otago, New Zealand

About the Presenter(s)
Syed Zulqernain Hussain is currently a PhD candidate at the University of Otago and on a sabbatical from State Bank of Pakistan where he is working as an Economist.

See this presentation on the full schedule – Saturday Schedule

Bookmark