The Effect Of Defense Spending On Us Output: A Factor Augmented Vector Autoregression (Favar) Approach
AbstractEmpirical 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.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Defence and Peace Economics.
Volume (Year): 21 (2010)
Issue (Month): 2 ()
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Other versions of this item:
- Rangan Gupta & Alain Kabundi & Emmanuel Ziramba, 2009. "The Effect Of Defense Spending On Us Output: A Factor Augmented Vector Autoregression (Favar) Approach," Working Papers 200911, University of Pretoria, Department of Economics.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- 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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