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Military Expenditure and Economic Activity: The Colombian Case

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  • Arias Andrés F.

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  • Laura Ardila
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    Abstract

    We enhance a standard RBC model to account for military expenditure and the costs of an internal conflict or war. The model captures the natural trade-off in military expenditure: crowding out of private consumption and investment but less destruction (and, therefore, higher marginal productivity) of private capital (and labor). Hence, military expenditure below (above) a certain threshold generates a positive (negative) net benefit in terms of output. The model is calibrated to an annual frequency using Colombian data. We find that an increase in military expenditure of 1% GDP (the current policy of Colombian authorities) increases investment and output above the steady state during several periods, before the shock fades away. Even though consumption falls on impact (to open up space for the additional military expenditure and private investment), it increases above its stationary trend after three periods, remains on positive grounds thereafter, and the cumulated net gain is positive.

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    Bibliographic Info

    Article provided by UNIVERSIDAD DE LOS ANDES-CEDE in its journal REVISTA DESARROLLO Y SOCIEDAD.

    Volume (Year): (2003)
    Issue (Month): ()
    Pages:

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    Handle: RePEc:col:000090:003895

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    Related research

    Keywords: Real business cycle; stationary state; military expenditure; crowding-out; productivity shock;

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    References

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    1. Collier, Paul & Hoeffler, Anke, 1998. "On Economic Causes of Civil War," Oxford Economic Papers, Oxford University Press, vol. 50(4), pages 563-73, October.
    2. Aizenman, Joshua & Glick, Reuven, 2003. "Military Expenditure, Threats, and Growth," Santa Cruz Center for International Economics, Working Paper Series qt41r4105h, Center for International Economics, UC Santa Cruz.
    3. Daniel Mejía & Carlos Esteban Posada, 2003. "Capital Destruction, Optimal Defense and Economic Growth," BORRADORES DE ECONOMIA 002096, BANCO DE LA REPÚBLICA.
    4. Michael D. Stroup & Jac C. Heckelman, 2001. "Size Of The Military Sector And Economic Growth: A Panel Data Analysis Of Africa And Latin America," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 329-360, November.
    5. Kosuke Imai & Jeremy M. Weinstein, 2000. "Measuring the Economic Impact of Civil War," CID Working Papers 51, Center for International Development at Harvard University.
    6. Malcolm Knight & Norman Loayza & Delano Villanueva, 1996. "The Peace Dividend: Military Spending Cuts and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 1-37, March.
    7. repec:fth:oxesaf:95-8 is not listed on IDEAS
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    Cited by:
    1. Stéphane Auray & Aurélien Eyquem & Frédéric Jouneau-Sion, 2009. "Riots, Battles and Cycles," Cahiers de recherche 09-01, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke, revised 05 Apr 2009.
    2. World Bank, 2005. "Colombia : Public Expenditure Review," World Bank Other Operational Studies 8559, The World Bank.
    3. Andres F. Arias & Hernan Maldonado, 2004. "FARC Terrorism in Colombia: A Clustering Analysis," INVESTIGACIÓN ECONÓMICA EN COLOMBIA 002715, FUNDACIÓN PONDO.
    4. Andrés Felipe Mora Cortés, 2013. "Conflicto, violencia socioeconómica y desplazamiento forzado en Colombia," REVISTA CUADERNOS DE ECONOMÍA, UN - RCE - CID.

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