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Unobserved common factors in military expenditure interactions across MENA countries

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  • Elisa Cavatorta

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

In this paper we explore the patterns of interactions between military expenditure shares in the MENA region over the period 1979-2007. We explore if there are latent common factors that impact on the military expenditures of 15 countries in the MENA region and whether these factors can be interpreted. Unobserved common factors induce cross-sectional dependence and may lead traditional panel-time series estimators to be inconsistent. To identify these latent factors we apply the Principal Component Analysis. We evaluate the interpretation of the estimated factors using the Multiple-Indicator Multiple-Cause model. We found that there is a substantial evidence of cross-sectional dependence in the MENA region, induced mainly by two unobserved factors, but these factors are difficult to interpret.

Suggested Citation

  • Elisa Cavatorta, 2010. "Unobserved common factors in military expenditure interactions across MENA countries," Birkbeck Working Papers in Economics and Finance 1001, Birkbeck, Department of Economics, Mathematics & Statistics.
    • Handle: RePEc:bbk:bbkefp:1001
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    File URL: https://eprints.bbk.ac.uk/id/eprint/7554
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    References listed on IDEAS

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    1. J Paul Dunne & Sam Perlo-Freeman & Ron P Smith, 2008. "Determining Military Expenditures: Arms Races and Spill-Over Effects in Cross-Section and Panel Data," Discussion Papers 0801, British University in Egypt, Faulty of Business Administration, Economics and Political Science.
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    3. Devarajan, Shantayanan & Swaroop, vinaya, 1998. "The implications of foreign aid fungibility for development assistance," Policy Research Working Paper Series 2022, The World Bank.
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    5. Trevor Breusch, 2005. "Estimating the Underground Economy using MIMIC Models," Econometrics 0507003, University Library of Munich, Germany, revised 15 Dec 2005.
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    1. Elisa Cavatorta & Ron P. Smith, 2017. "Factor Models in Panels with Cross-sectional Dependence: An Application to the Extended SIPRI Military Expenditure Data," Defence and Peace Economics, Taylor & Francis Journals, vol. 28(4), pages 437-456, July.

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