The Gravity of War


Recent events underscore the need to better understand the macroeconomic consequences of war, not only for the countries directly involved in military conflict but also its international spillovers. This paper studies the economic consequences of 76 interstate wars since 1870. We show that wars constitute large negative supply shocks for war-site economies: major wars raise inflation by some 15-20 percentage points for several years and lower economic activity by more than 30 percent relative to trend. The spillovers to third countries that are not party to the war but geographically close are also substantial and operate through trade gravity channels. Major wars raise inflation in neighboring countries by almost 10 percentage points and depress economic activity more than 10 percent relative to trend. We calibrate an international business cycle model to capture key features of the data for war-site economies and find that its predictions for the spillovers of war are consistent with the evidence.

Working Paper (coming soon, available on request)