This paper incorporates the nature of terrorist threats into the Yarri (1965)–Blanchard (1985) model and uses it to discuss the transitional dynamics of consumption in response to an anticipated terrorist attack. It is shown that if the terrorist attack is pre‐announced (and hence anticipated) and the public is fully informed, short‐term consumption may misadjust from its long‐term level. Before the terrorist attacks actually take place, households may be motivated to increase (rather than decrease) their consumption as a temporary response. This result may explain the temporary phenomenon of the increased consumption of certain types of goods in the period following September 11.
