Defense and the Economy, 1990-2016

This chapter studies the economics of defense in Israel, focusing on the effect of defense-related shocks on the economy from 1990 to 2016. This period includes several important defense-related shocks, such as the Oslo Accords, the Second Palestinian Uprising (Intifada), the disengagement from Gaza, the Second Lebanon War, and the massive rocket attacks from Gaza on Israel. The chapter examines the effects of these shocks - and compares them to the effects of other types of shocks - on the economy from the perspective of participants in the stock market and the foreign exchange market. The analysis shows that relative to the first part of the period (1990-2005), in the second (2005-2016) security-related shocks, and especially those associated with the Israeli-Palestinian conflict, had a much weaker effect on the stock market and the foreign exchange market, while external economic shocks had a much stronger effect. A similar pattern is observed in the behavior of additional variables examined. Analysis of survey data suggest a possible explanation for the diminished effect of security-related shocks, specifically those associated with the Israeli-Palestinian conflict: following the Second Intifada (2000-2005), the public ceased to believe that the Israeli-Palestinian conflict may be resolved peacefully in the near future.