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

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Author Info
Rangan Gupta () (Department of Economics, University of Pretoria)
Alain Kabundi () (Department of Economics and Econometrics, University of Johannesburg)
Emmanuel Ziramba () (Department of Economics, University of South Africa)

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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 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 and long lasting effect on the growth rate of real GNP, but the effect is significant only for two quarters. In addition, we indicate that the mixed empirical evidence could be a result of small information sets, by showing the sensitivity of the results to sample size using a small-scale VAR typically used in the literature to analyze the effect of defense spending on output. Finally, given that the FAVAR model was found outperform the VAR in forecasting the growth rate of real GNP, we concluded that the FAVAR framework is superior and should be relied upon more for the analysis of the impact of defense spending on US output.

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Publisher Info
Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200911.

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Length: 10 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:pre:wpaper:200911

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Related research
Keywords: Defense Spending; Output; FAVAR;

Other versions of this item:

Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. H. Sonmez Atesoglu, 2009. "Defense Spending And Aggregate Output In The United States," Defence and Peace Economics, Taylor and Francis Journals, vol. 20(1), pages 21-26. [Downloadable!] (restricted)
  2. Jeffrey Smith & M. H. Tuttle, 2008. "Does Defense Spending Really Promote Aggregate Output In The United States?," Defence and Peace Economics, Taylor and Francis Journals, vol. 19(6), pages 435-447. [Downloadable!] (restricted)
  3. James H. Stock & Mark W. Watson, 1998. "Diffusion Indexes," NBER Working Papers 6702, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Anindya Banerjee & Massimiliano Marcellino, 2008. "Factor-augmented Error Correction Models," Economics Working Papers ECO2008/15, European University Institute. [Downloadable!]
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This page was last updated on 2009-11-13.

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