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This paper won Third Place in the Best Term Paper category at the October 2015 Minnesota Economic Association conference. It was written for Advanced Econometrics and the advisor was Gary Krueger.


This article seeks a connection between the rate at which governments can borrow money and terrorist activity within their country. Government borrowing habits can play a large role in economic growth, and understanding the determinants of the rate at which money can be borrowed is valuable. The traditional bond yield study includes various macroeconomic indicators and estimates the role that they play in the borrow- ing rate. A straightforward theory to connect utility theory of consumer choice to risk preferences and the decision to invest in a bond is derived. Using data from the Inter- national Monetary Fund and University of Maryland's Global Terrorism Database, this study will attempt a new approach. Instead of controlling for complicated and often endogenous macroeconomic indicators, an autoregressive estimation technique will be employed. A dual bond estimation structure (standard bonds as the dependent vari- able regressed on lagged values of the demeaned series) yields strong results to suggest that governments do pay a price in the rate at which they can borrow as a result of terrorist attacks. Homogenous estimation structures provide less convincing results.

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