Abstract
This study estimates the impact of terrorism on consumer sentiment at city level in Pakistan. Tagged as one of the most dangerous places of the world, Pakistan is the epicenter of terrorism since the events of 9/11. Apart from tangible financial losses and civilian casualties, there is an equally important but unnoticed and intangible impact of terrorism on consumer sentiment in Pakistan. Consumer sentiment is an important indicator as it triggers economic activity and in case of Pakistan, consumer sentiment measured by Diffusion Index is used as a policy input in formulation of monetary policy. Using city fixed effects model on balanced panel data of 59 cities and 36 time periods (bi-monthly), the study estimates that whenever there is a terrorist incident in a city, irrespective of the intensity of the attack; sentiment of the consumers in the targeted city turns pessimistic (diffusion index decreases) relative to those cities which do not face an attack. The coefficient of terrorism is equal to one-half standard deviation of the diffusion index (consumer sentiment) and is consistent in all specifications. Reverse causality test indicates that occurrence of terrorist activity is exogenous i.e., current and past sentiment do not impact or promote terrorism. Since the impact of terrorism is more significant at the affected cities, there is a need for a region-specific (city-specific) counter-terrorism policy instead of a generic national policy.
Details
Presentation Type
Paper Presentation in a Themed Session
Theme
KEYWORDS
TERRORISM, CONSUMER, SENTIMENT, DIFFUSION INDEX
