The Economics of War

Fantastic new IMF research on the macroeconomics of conflict

I have long been a big fan of IMF research. It’s not just the some 300 working papers that the Fund puts out each year. It is also the outstanding collaborative efforts that are published in the form of two analytical chapters that accompany each issue of the IMF’s twice-yearly flagship exercise, the World Economic Outlook.

The April 2026 WEO is a striking case in point. Chapter 3, “The Macroeconomics of Conflicts and Recovery,” is timed brilliantly. With the Middle East once again erupting in a devastating war, this 22-page chapter provides context and analysis that is simply not available anywhere else. Three points stand out:

First, the historical trend on conflicts is ominous. As can be seen in blue line of the first chart below, the number of conflicts has risen to a post-World War II high. It should be noted that these data only run through 2024; partial data for 2025 and early 2026 point to further increases in the conflict count. This trend has been driven largely, but not exclusively, by within-state conflicts such as civil wars. By contrast, conflicts between states have been less frequent, although, as the IMF notes, their incidence has edged up in recent years. Most of these occurrences have been of relatively short duration, and as the IMF’s application of AI-enabled large-language models finds, they have been especially concentrated in the Middle East and sub-Saharan Africa. The geopolitical threats index (the red line) captures global threats related to war, peace, military buildups, nuclear risks, and terrorism.

Second, the impact of wars lasts much longer than the relatively short duration of kinetic conflicts. As the second chart indicates, wars are normally associated with an immediate output loss of about 3% of GDP in the first year of conflict. But wars are not like the Covid-related temporary shutdowns that occurred in 2020-21; that means, don’t count on a quick and sharp snapback once the war ends. The IMF finds that the negative impacts of conflict build over time, reaching a cumulative output loss of about 7% of GDP five years after the onset of conflict. This assessment also reflects the collateral damage of spillover effects on conflict-adjacent nations. With Iran in control of the Strait of Hormuz, effectively putting a chokehold on 20% of global oil supply and significant constraints on liquid natural gas, fertilizer, and other related products, there is good reason to believe the collateral impacts of the current war could well exceed those of earlier periods.

Third, war-related macroeconomic impacts are worse than the impacts of other shocks. This is illustrated in the third chart below, which compares estimates of three-year conflict-related losses with impacts from four other types of shocks — banking crises, currency crises, sovereign debt crises, and natural disasters. Significantly, the typical natural disaster comes in second, behind wars. That shouldn’t be surprising, as both wars and natural disasters involve outright destructions in physical capacity and prolonged impairments of productivity, impacts that are far less severe in the three types of financial crises — banking, currency, and sovereign debt — shown in this chart.

As the title of this chapter indicates, the IMF’s research on conflicts also focuses on the macroeconomic patterns of postwar recoveries. More on this point in a subsequent post, but the key conclusion to stress at this early juncture of the US-Iran ceasefire, is that fragile recoveries are associated with fragile peace settlements. A broken peace and a relapse of hostilities typically entail a reset of the downside impacts of the conflict “clock” as described above. The IMF also finds that postwar recoveries tend to be slow and incomplete, recouping only a little more than half the conflict-associated output loss of 7% of GDP estimated over the five years following the outbreak of war. The lack of a sharper snapback draws on two points noted earlier — the gradual repair of severely damaged (or “obliterated”) capital stock and the likelihood of lagged productivity improvements following a war.

The IMF’s findings come with the usual array of caveats associated with most macroeconomic analysis. Conflicts are heterogeneous — uneven in terms of duration and intensity; that cautions against any efforts to describe a “typical war.” It follows that prescriptive policy responses need to be tailor-made for the unique circumstances of individual countries. Moreover, political economy considerations are stressed as important in shaping outcomes, especially the distinction between a fragile and durable peace; that implies that inadequate, or poor, policy responses to conflict may well be an endogenous source of a relapse. Finally, like all macro impact analysis, there is a wide range of uncertainty around the IMF’s point estimates; transparent online appendices provide probabilistic ranges around many of the findings noted (and charted) above.

The 16-person IMF research team that produced Chapter 3 in the April 2026 WEO used a number of different methodological approaches to reach their conclusions — including, but not limited to, the AI-based construction of new datasets noted above, a “difference-in-difference” cross-country empirical analysis, survey-based data of “older” individuals (above the age of 50) to measure long-term health-related scarring impacts of conflict, a variety of case studies drawn from project-based and firm level experience, and simulations from a large, open-econometric model. Like I stated at the outset, IMF research is in a league of its own!

As of this writing, the war against Iran is 44 days old. A controversial and highly tenuous ceasefire has been brokered by the Pakistani government, and US and Iranian negotiators have just completed a marathon first session in Islamabad that did not end well. The media coverage on precedents and consequences has become exhausting to follow; pick your favorite example — the oil shocks of the 1970s, America’s “Suez moment,” the lengthy Vietnam War negotiations, Chamberlain at Munich, and on and on. No one knows the endgame. But thanks to the IMF research team, at least we have a solid framework to help assess the context and the broad impacts of another devastating war in an increasingly conflict-prone world. That certainly beats shooting from the hip as many politicians are often inclined to do.