Abstract
Inherited growth theory suggests that the long-term economic effects of the terrorist acts of 11 September are unlikely to be significant. Aggregate supply is unlikely to be affected in the long run. In the shorter term, theory suggests and evidence supports the idea that the terrorist acts have contributed to reducing aggregate demand. This has engendered a typically neo-Keynesian policy response. Governments have accepted the responsibility of managing aggregate demand via monetary and fiscal policy instruments in an attempt to avoid recession and unemployment. The economic policy response to international terrorist acts represents another chapter in the story of neo-Keynesian resurgence. Since the stock market crash in 1987, governments have tended to respond to the threat of recession in a fairly conventional neo-Keynesian way. In the case of the response to 11 September, they have been helped by the fact that the dangers of policy overkill were muted. Many economies were heading for recession anyhow and inflation was at historically low levels. Looking to the future, there may be a systemic role for the IMF to play in co- ordinating such responses to external shocks from wherever they emanate, and this should become a part of the ongoing debate about reforming the Fund.