MILITARY EXPENDITURE AND GRANGER CAUSALITY: A CRITICAL REVIEW

A large literature has used tests for Granger (1969) non‐causality, GNC, to examine the interaction of military spending with the economy. Such tests answer a specific although quite limited question: can one reject the null hypothesis that one variable does not help predict another? If one can reject, there is said to be Granger causality, GC. Although the limitations of GNC tests are well known, they are often not emphasised in the applied literature and so may be forgotten. This paper considers the econometric and methodological issues involved and illustrates them with data for the US and other countries. There are three main issues. First, the tests may not be informative about the substantive issue, the interaction of military expenditure and the economy, since Granger causality does not correspond to the usual notion of economic causality. To determine the relationship of the two notions of causality requires an identified structural model. Second, the tests are very sensitive to specification. GNC testing is usually done in the context of a vector autoregression, VAR, and the test results are sensitive to the variables and deterministic terms included in the VAR, lag length, sample or observation window used, treatment of integration and cointegration and level of significance. Statistical criteria may not be very informative about these choices. Third, since the parameters are not structural, the test results may not be stable over different time periods or different countries.     

DEFENSE SPENDING AND ECONOMIC GROWTH IN TURKEY: A LINEAR AND NON‐LINEAR GRANGER CAUSALITY APPROACH

This paper uses linear and non‐linear Granger causality methods to determine the causal relationship between defense spending and economic growth in Turkey for the period 1949–2004. The innovative feature of this paper is that it provides evidence regarding the nonlinear causal dependence between military spending and economic growth in Turkey. The empirical results contribute to the empirical literature by indicating support for both linear and non‐linear causality between military expenditures and economic development and they may prove useful in theoretical and empirical research by regulators and policy makers.     

Defense spending and economic growth: Extended empirical analysis for the European Union

Previous empirical studies on the defense spending-economic growth nexus such as Kollias et al. (2007 Kollias, C., N. Mylonidis, and S. Paleologou. 2007. “A panel data analysis of the nexus between defense spending and growth in the European Union.” Defense and Peace Economics 18 (1): 75–85.[Taylor & Francis Online], [Web of Science ®] , [Google Scholar]), Mylonidis (2008 Mylonidis, N. 2008. “Revisiting the nexus between military spending and growth in the European Union.” Defense and Peace Economics 19 (4): 265–272.[Taylor & Francis Online], [Web of Science ®] , [Google Scholar]), Dunne and Nikolaidou (2012 Dunne, J. P., and E. Nikolaidou. 2012. “Defense spending and economic growth in the EU15.” Defense and Peace Economics 23 (6): 537–548.[Taylor & Francis Online], [Web of Science ®] , [Google Scholar]) analyzed this relationship in the case of the EU15. This study extends the analysis with the inclusion of more EU members and investigates the long run causal ordering between the two variables. Findings reported herein are not uniformed across all EU members. It is also found that end of Cold War has significant negative impact on defense expenditures of former east-European countries.     

Panel Causality Analysis Between Defence Expenditure and Economic Growth in Developed Countries

There is much controversy in the literature over whether military expenditures have a positive, negative or no relation impact on economic growth. The aim of this paper is to determine the relationship between GDP and defence expenditure. The study analyses GDP and defence expenditures of the developed countries with cross-sectional ADF and SURADF unit root tests using annual data for the years 1980–2007. We conclude that in the long term, according to the Pedroni cointegration test, there exists a relationship between defence expenditure and economic growth. Furthermore, by utilizing the Granger causality test, we find that defence expenditure is a factor in economic growth. In other words, our study validates the hypothesis that defence spending by economically developed countries positively contributes to their economics.     

A RANDOM RATIONING MECHANISM WHICH REDUCES THE RISKS OF NO SON LEFT AT HOME

This paper empirically re‐examines the long‐run co‐movements and the causal relationships between GDP and defence expenditures in a multivariate model with real defence expenditure per capita (ME), real GDP per capita (GDP), and real capital stock per capita (K). We apply the view of the aggregate production function to construct the empirical model. Using up‐to‐date data for 27 OECD countries and 62 non‐OECD countries for the 1988–2003 period, we combine cross‐sectional and time series data to re‐investigate the relationship between GDP and ME. Previous studies using time series data may have yielded misleading results on account of the short time span of typical datasets. By contrast, we use recently developed panel unit root tests and heterogeneous panel cointegration tests, and conclude that there is fairly strong evidence in favour of the hypothesis of a long‐run equilibrium relationship between GDP and ME. The long‐run panel regression parameter results, such as the fully modified OLS, indicate that a positive relationship between GDP and ME only holds for OECD countries, whereas a negative relationship from ME to GDP only exists in non‐OECD countries under examination and in the panel as a whole. Furthermore, by implementing the dynamic panel‐based error correction model, we determine that GDP and ME lack short‐run causalities, but do show long‐run bidirectional causalities in both OECD and non‐OECD countries.     

Introduction: Symposium on defence economics

This study revisits the relationship between defence spending and economic growth via a Keynesian model in Pakistan using the autoregressive distributive lag bounds testing approach to cointegration. Empirical evidence suggests a stable cointegration relationship between defence spending and economic growth. An increase in defence spending reduces the pace of economic growth confirming the validity of Keynesian hypothesis in this case. Current economic growth is positively linked with economic growth of previous periods while a rise in non-military expenditures boosts economic growth. Interest rate is inversely associated with economic growth. Finally, unidirectional causality running from military spending to economic growth is found.     

Book review

La Conversion économique du secteur militaire, J. FONTANEL, Economica, Paris, 1994, pp. 112. Paperback. ISBN 2–7178–2650–5.     

Defense Spending and Economic Growth: Some Empirical Evidence from the Arab Gulf Region

The present paper investigates the causal relationship between defense spending and economic growth in six Gulf countries for the period 1975-1998. I use Granger-causality test within a multivariate error-correction framework to explore the existence and direction of causality between these two variables. The empirical results indicate that neither growth nor defense can be considered exogenous and that the relationship between them cannot be generalized across countries. Two implications can be derived from these findings. One is the need for more studies, especially from developing countries, using time-series data. The other is that decisions on defense spending should be based on each country's socio-economic circumstances. Given the small sample size, however, caution is advised in considering the above results and their implications as final.     

FIGHTING TERRORISM: ARE MILITARY MEASURES EFFECTIVE? EMPIRICAL EVIDENCE FROM TURKEY

The present article aims at investigating the causal relationship between defense spending and terrorism in Turkey using the Autoregressive Distributed Lag (ARDL) bounds testing procedure and Granger‐causality analysis. The findings reveal that there exists a unidirectional causality running form terrorist attacks to defense spending as expected, but not vice versa. In the light of this finding it can be inferred that military anti‐terrorism measures alone are not sufficient to prevent terrorism.