The external cost of war

Title: The external cost of war (with Federle, Meier, Mutschler, Schularick)

Abstract: In an integrated global economy, wars impose costs not only on the economy in which the destruction occurs but also on third countries. Understanding the external costs of war, both empirically and theoretically, is the main goal of this paper. We study the economic effects of interstate wars using a new data set spanning 150 years of data for more than 60 countries. We find large negative effects for countries that are geographically close to the war site. Output in neighboring countries falls by more than 10 percent relative to trend over a 5-year period, and inflation rises sharply. These effects---basically an adverse supply shock---decline in distance to the war site, and can even turn positive for faraway economies. As such, wars create winners and losers in the international economy. We show that our empirical results are consistent with an international business cycle model in which spillovers operate through trade channels, price changes, and market access.