THE EFFECTS OF DESTRUCTION: A MACROECONOMIC STORY

OF DISSERTATION THE EFFECTS OF DESTRUCTION: A MACROECONOMIC STORY Destructive events such as natural disasters and terrorist attacks occur not only in developing economies but also developed economies. Consequently, the response of these economies has been observed in case of both type of events. This dissertation is a collection of essays regarding natural disasters, terrorist attacks and the macroeconomy. Specifically, I examine the response of local labor markets that reflect a wide spectrum of economies, but also have a safety-net in the form of being part of a developed country in the aftermath of a violent tornado. Further, I explore the heterogeneity in the economies response to natural disasters and terrorist attacks. Additionally, I investigate the effects of terrorism on growth and its disaggregated value added components. The first chapter focuses on the effects of tornadoes on local labor markets. I examine the change in local labor markets caused by extreme tornadoes that occur in counties of the contiguous United States. I also investigate the effect these tornadoes have on neighboring counties and evaluate the labor market response in urban and rural counties separately as well. Using a generalized difference-in-difference approach on quarterly data spanning from 1975 to 2016, I find that counties experience persistently higher wages per worker two years following a violent tornado. The effects on urban county can be observed on employment, while the effect in the rural county is observed on wages per worker. Further, evaluating the response of labor markets by sectors reveals the industrial sectors that experience increased labor market activity. The second chapter evaluates the long-run effects of natural disasters and terrorist attacks on growth and the channels through which they affect growth. Using the conceptual framework of a Solow-Swan model I examine an unbalanced annual panel of 125 countries spanning from 1970 to 2015 and find that domestic terrorist attacks, floods, and storms have a similar negative effect on growth, while transnational terrorist attacks and earthquakes have no significant effect on growth. Examining the channels through which they affect growth brings to the forefront the differences between these different types of events. I find that domestic terrorist attacks lead to increased military expenditures in their wake, while floods lead to increased non-military expenditures in their aftermath. Reviewing the data by developed and emerging economies reveals that developed economies are better able to absorb the shock of terrorist attacks as well as natural disasters. I find that although emerging economies are able to absorb the shock of transnational and domestic terrorist attacks, they experience some adverse effects from floods and storms. The third chapter examines the path of GDP growth and its disaggregated industrial, service, and agricultural sector value added components in the aftermath of two types of terrorism transnational and domestic terrorism. Using a panel VAR model on cross country annual data from 1970 to 2015 I find that fatalities caused by neither domestic nor transnational terrorist attacks lead to a significant change in GDP growth. Examining the disaggregated industrial, service, and agricultural sector components of GDP growth reveals that even disaggregated the value added components of GDP growth experience no adverse effects from the deaths caused by transnational and domestic terrorist attacks. I also distinguish the emerging economies from the entire sample to find that GDP growth in emerging economies experience no significant effects due to the casualties of transnational and domestic terrorist attacks.