By Ethan B. Kapstein† Adityamohan Tantravah

Among its many deleterious effects on social well-being, violent conflict can undermine the economies
of the countries in which it is ongoing. From a macroeconomic perspective, internal conflict can lead
to reduced investment, output, and growth. We show that it can also increase the borrowing costs on
government-issued debt. Specifically, we examine the effects of drug-related homicides on the spread
between the monetary policy rate and short-term Mexican treasury bills, called ”CETES,” during the
period 2010-2017. We show that homicides have a statistically significant effect on the spread, and in
drawing a connection between violence and interest rates, we make a novel contribution to the literature
on the macroeconomic effects of conflict.

Princeton, NJ: ESOC Working Paper No. 26). Empirical Studies of Conflict Project, 2021. 22p.