TERRORIST THREATS AND TRANSITIONAL DYNAMICS IN AN OVERLAPPING GENERATIONS MODEL

This paper incorporates the nature of terrorist threats into the Yarri (1965)-Blanchard (1985) model and uses it to discuss the transitional dynamics of consumption in response to an anticipated terrorist attack. It is shown that if the terrorist attack is pre-announced (and hence anticipated) and the public is fully informed, short-term consumption may misadjust from its long-term level. Before the terrorist attacks actually take place, households may be motivated to increase (rather than decrease) their consumption as a temporary response. This result may explain the temporary phenomenon of the increased consumption of certain types of goods in the period following September 11.