A note on the macroeconomic consequences of ethnic/racial tension

- This paper aims to assess how changes in ethnic/racial tension (over time) affect economic growth in the short-run.
- Time-varying index of ethnic/racial tension.
- Results show that racial tension has detrimental effects on growth, and those effects are more pronounced during low growth periods.

While many studies stressed the importance of ethnic fractionalization on long-term economic growth, neither ethnic fractionalization always leads to ethnic conflict nor the intensity of conflict is constant over time. To address this potential bias, we construct an ethnic/racial tension index by using the number of US news articles that contain certain keywords. Utilizing this index we test the predictions of a simple theoretical model in a Markov Switching framework which allows to identify the impact of ethnic/racial tension in different states of the economy. Consistent with our theoretical predictions, results show that the magnitude of the impact of ethnic/racial tension is larger during low-growth periods.