Do Financial Crises Make War More Likely?

Abstract

Financial crises precede deep and prolonged recessions. Political leaders face enormous challenges when confronting such dire economic situation, and they frequently have to face the possibility of losing power. In order to avoid this outcome, democratic and autocratic leaders may use war as a diversionary instrument to distract audiences at home. This empirical study enquires on the political consequences of financial crises. Using data from Rogoff and Reinhart (2009) including 66 developed and developing countries over the years 1800-2008, we compiled a panel to test the hypothesis that financial crises increase the likelihood of the onset of international conflict. We look at political instability, defined as turnover of the political leader, and we find that leaders can use war as a tool for political survival.