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The Effect Of Defense Spending On Us Output: A Factor Augmented Vector Autoregression (Favar) Approach

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  • Rangan Gupta
  • Alain Kabundi
  • Emmanuel Ziramba

Abstract

Empirical evidence on the effect of defense spending on US output is at best mixed. Against this backdrop, this paper assesses the impact of a positive defense spending shock on the growth rate of real GNP using a Factor Augmented Vector Autoregressive (FAVAR) model estimated with 116 variables spanning the quarterly period of 1976:01 to 2005:02. Overall, the results show that a positive shock to the growth rate of the real defense spending translates to a positive short-run effect on the growth rate of real GNP lasting up to ten quarters, but the effect is significant only for two quarters. Beyond the tenth quarter, the effect becomes negative and shows signs of slow reversal at around the 17th quarter. Our results tend to indicate that the mixed empirical evidence, based on small-scale Vector Autoregressive (VAR) and Vector Error Correction (VEC) models, could be a result of a small information set not capturing the true theoretical relationships between the two variables of interest.

Suggested Citation

  • Rangan Gupta & Alain Kabundi & Emmanuel Ziramba, 2010. "The Effect Of Defense Spending On Us Output: A Factor Augmented Vector Autoregression (Favar) Approach," Defence and Peace Economics, Taylor & Francis Journals, vol. 21(2), pages 135-147.
    • Handle: RePEc:taf:defpea:v:21:y:2010:i:2:p:135-147
    DOI: 10.1080/10242690903569056
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    Cited by:

    1. Shahbaz, Muhammad & Leitão, Nuno Carlos & Uddin, Gazi Salah & Arouri, Mohamed & Teulon, Frédéric, 2013. "Should Portuguese economy invest in defense spending? A revisit," Economic Modelling, Elsevier, vol. 35(C), pages 805-815.
    2. Takao Fujii & Kazuki Hiraga & Masafumi Kozuka, 2012. "Analyses of Public Investment Shock in Japan: Factor Augmented Vector Autoregressive Approach," Keio/Kyoto Joint Global COE Discussion Paper Series 2012-006, Keio/Kyoto Joint Global COE Program.
    3. Charles Shaaba Saba & Nicholas Ngepah, 2022. "Nexus between defence spending, economic growth and development: evidence from a disaggregated panel data analysis," Economic Change and Restructuring, Springer, vol. 55(1), pages 109-151, February.
    4. Rabnawaz, Ambar & Jafar, Rana Muhammad Sohail, 2015. "Impact of Public Investment on Economic Growth," MPRA Paper 70377, University Library of Munich, Germany.
    5. Muhammad Shahbaz & Talat Afza & Muhammad Shahbaz Shabbir, 2013. "Does Defence Spending Impede Economic Growth? Cointegration And Causality Analysis For Pakistan," Defence and Peace Economics, Taylor & Francis Journals, vol. 24(2), pages 105-120, April.
    6. Saba Charles Shaaba, 2022. "Defence Spending and Economic Growth in South Africa: Evidence from Cointegration and Co-Feature Analysis," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 28(1), pages 51-100, February.
    7. Tiwari, Aviral & Shahbaz, Muhammad, 2011. "Does Defence Spending Stimulate Economic Growth in India?," MPRA Paper 30880, University Library of Munich, Germany, revised 18 Apr 2011.
    8. Kollias, Christos & Paleologou, Suzanna-Maria, 2013. "Guns, highways and economic growth in the United States," Economic Modelling, Elsevier, vol. 30(C), pages 449-455.
    9. repec:ipg:wpaper:2014-380 is not listed on IDEAS
    10. Yi-Hua Wu & Chih-Chin Ho & Eric S. Lin, 2017. "Measuring the Impact of Military Spending: How Far Does a DSGE Model Deviate from Reality?," Defence and Peace Economics, Taylor & Francis Journals, vol. 28(5), pages 585-608, September.

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    More about this item

    Keywords

    Defense spending; Output; FAVAR;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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