Abstract
Given the increase in the number of terrorist attacks in African countries, a better understanding of the relationship between terrorism, the informal economy and public debt is essential for policymakers. The model is empirically tested for 47 countries during the period 1996–2015. We use ordinary least squares (OLS), random effects (ER) and system generalized method of moments (GMM). Three terrorism indicators are used: the uncertain, the domestic, and the transnational. The results confirm that the rise in terrorism and the informal economy lead to an increase in public debt. The results also show that the informal economy magnifies the effect of terrorism on public debt. In addition, the results suggest that a larger informal economy reduces income taxes and therefore increases public debt and the increase in public spending reinforces the effects of terrorism on public debt. The reduction of terrorism should therefore be governments’ primary political objective. Given the detected complementarity between terrorism and the informal economy, the reduction of terrorism would also reduce the size of the informal economy and the public debt. The reduction of terrorism will also minimize the harmful effects of terrorism on public debt through public spending.