Macroeconomic costs of conflict are generally very large, with GDP per capita about 28 percent lower ten years after conflict onset. This is overwhelmingly driven by private consumption, which falls by 25 percent ten years after conflict onset. Conflict is also associated with dramatic declines...

This paper reproduces Lucas's analysis of the costs of business cycles in an economy with a low probability, crash state in consumption growth. For reasonable parameter values, it is shown that the presence of a crash state dramatically increases the costs of consumption volatility....