Abstract:
The objective of the study is to examine the macroeconomic consequences of terrorism in the
context of Pakistan over a period of 1975 to 2011. The study examine the short run and long run
relationship between terrorism and their determinants. Both objectives have been achieved with
the sophisticated econometrics techniques including cointegration theory, Granger causality test
and variance decomposition, etc. The result reveals that macroeconomic factors cause the
terrorism incidence in Pakistan. Macroeconomic indicators i.e., population growth, price level,
poverty and political instability have at least one cointegration relationship with terrorism
incidence. However, income inequality, unemployment and trade openness have no long-run
cointegration with the terrorism incidence in Pakistan. Therefore, we may conclude that, for
some how, Pakistan’s macroeconomic indicators have significant long-term equilibrium with
terrorism incidence. The result of Granger causality indicates that except unemployment, all
other macroeconomic indicators have unidirectional causality with terrorism incidence.
Unemployment has a bi-directional causality with the terrorism incidence in Pakistan. The
results of variance decomposition indicate that there exists statistically significant cointegration
among macroeconomic factors and terrorism incidence in Pakistan during 1975–2010. All
macroeconomic factors, CPI exerts the largest influence and the influence of unemployment
(UN) seems relatively the least whose steady contribution level for terrorism incidence changes
while the influence of GDPPC, GINI, POP, POV, PS and TOP follows with steady contribution
level.
