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 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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Bibliographic InfoPaper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200911.
Length: 10 pages
Date of creation: Mar 2009
Date of revision:
Defense Spending; Output; FAVAR;
Other versions of this item:
- 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 and Francis Journals, vol. 21(2), pages 135-147.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
- H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-13 (All new papers)
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- 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 and Francis Journals, vol. 24(2), pages 105-120, April.
- Shahbaz, Muhammad & Afza, Talat & Shabbir, Shahbaz Muhammad, 2011. "Does defence spending impede economic growth? cointegration and causality analysis for Pakistan," MPRA Paper 30887, University Library of Munich, Germany, revised 27 Mar 2011.
- 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.
- Muhammad, Shahbaz & Nuno, Carlos Leitão & Ghazi, Salah Uddin, 2012. "Should Portuguese Economy Invest in Defense Spending? A Revisit," MPRA Paper 42289, University Library of Munich, Germany, revised 26 Oct 2012.
- 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.
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