The impact of violent political conflict on commodity prices: The Israeli food market

The impact of violent conflict on the state of the economy has been studied extensively since the two recent decades. In most studies the state of the economy is operationalized by stock market indices of the respective countries. In this paper we suggest investigating the impact of violent conflict on the lives of civilians by looking also at food prices. We gathered a unique dataset of daily frequency for this purpose which offers a number of variables quantifying relevant events which occurred between 1997 and 2011 in the Israeli-Palestinian conflict. We model domestic Israeli prices of several fresh fruits and vegetables using a GARCH framework and control for the state of the economy, exchange rate effects, international prices, seasonal variation and Muslim holidays. Intensity of the conflict is measured by the incidences of movement restrictions which are implemented due to security reasons and temporarily cut off the otherwise dynamic agricultural trade between Israel and the Palestinian Territories, and daily casualty numbers for both sides of the conflict. Our analysis yields plausible results for the comprehensive impact of the controls as well as of the conflict variables. We find that comprehensive closures imposed on the Palestinian Territories do not show much impact on food price dynamics in Israel. Conversely, while days with many Israeli casualties raise both the mean and the volatility of several prices, the opposite effect is observed in the case of high numbers of fatalities on the Palestinian side