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One of the perennial questions in the scientific study of war is how war affects the economy. The authors examine the influence that the political developments within three war regions had on global financial markets (CAC, Dow Jones, FTSE) from 1990 to 2000. They embed a rational expectation framework within commercial liberalism, a theoretical strand that tries to assess the interrelationship between war and economic exchanges. Time-series analyses account for the effects that the conflict between Israel and the Palestinians, the first confrontation of a U.S.-led alliance against Iraq, and the wars fought in Ex-Yugoslavia exerted. Using daily stock market data, the authors show that the conflicts affected the interactions at the core financial markets in the Western world negatively, if they had any systematic influence at all. They argue that these results lend some support to the rational expectations version of commercial liberalism.
Keywords: economy and war; commercial liberalism; financial markets; war rallies; E-GARCH and T-GARCH models; event data
Although the economic causes and consequences of armed conflict have received widespread attention (e.g., Barbieri 2002; Mansfield and Pollins 2003; Schneider, Barbieri, and Gleditsch 2003), we know relatively little about the costs of war despite some recent comparative studies (Collier 1999; Cranna 1994; Murdoch and Sandier 2002). Our deficient understanding of the interrelationship between war and the economy might contribute to the mollifying rhetoric that some political leaders use in the wake of war to downplay the consequences of the impending militarized conflict. Nordhaus (2002,51 ) recently wrote in this vein that "while historians have documented the many miscalculations involved in war, little has been written on faulty economic forecasts." Most studies conclude that the aggregate economic consequences of armed conflict are considerable. A research team headed by Cranna (1994, 197) concludes, based on the detailed analysis of seven cases, that "the impact of conflict on human lives, economic development and the environment is devastating." Even optimists maintain that the costs of war typically only vanish within a period of two decades (Organski and Kugler 1977). Recent comparative evidence suggests that the rapid expansion of output that one can observe for the economic development of the United States during World War II is only typical for wars that were fought on foreign soil. As...