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Military Expenditure and Granger Causality: A Critical Review

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  • J Paul Dunne

    () (Department of Economics, University of the West of England)

  • Ron P. Smith

    () (Birkbeck College, University of London)

Abstract

A large literature has used tests for Granger (1969) non-causality, GNC, to examine the interaction of military spending with the economy. Such tests answer a specific though quite limited question: can one reject the null hypothesis that one variable does not help predict another? If this null is rejected, there is said to be Granger causality, GC. Although the limitations of GNC tests are well known, they are often not emphasised in the applied literature and so may be forgotten. This paper considers the econometric and methodological issues involved and illustrates them with data for the US and other countries. There are three main issues. First, the tests may not be informative about the substantive issue, the interaction of military expenditure and the economy. The difficulty is that Granger causality, incremental predictability, does not correspond to the usual notion of economic causality. To determine the relationship of the two notions of causality requires an identified structural model. Second, the tests are very sensitive to specification. GNC testing is usually done in the context of a vector autoregression, VAR, and the test results are sensitive to the variables and deterministic terms included in the VAR, lag length, sample or observation window used, treatment of integration and cointegration and level of significance. Statistical criteria may not be very informative about these choices. Third, since the parameters are not structural, the test results may not be stable over different time periods or different countries.

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File URL: http://carecon.org.uk/DPs/1007.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by University of the West of England, Department of Economics in its series Discussion Papers with number 1007.

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Length: 23 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:uwe:wpaper:1007

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Keywords: Military Spending; economic growth; causality; VAR conflict-affected states;

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References

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  1. Suleiman Abu-Bader & Aamer Abu-Qarn, 2003. "Government Expenditures, Military Spending and Economic Growth: Causality Evidence from Egypt, Israel and Syria," Working Papers 163, Ben-Gurion University of the Negev, Department of Economics.
  2. Luca Pieroni, 2009. "Military Expenditure And Economic Growth," Defence and Peace Economics, Taylor and Francis Journals, vol. 20(4), pages 327-339.
  3. Chien-Hsun Chen, 1993. "Causality between Defence Spending and Economic Growth: The Case of Mainland China," Journal of Economic Studies, Emerald Group Publishing, vol. 20(6), pages 37-43, October.
  4. Giorgio d'Agostino & Luca Pieroni & J Paul Dunne, 2010. "Assessing the Effects of Military Expenditure on Growth," Discussion Papers 1012, University of the West of England, Department of Economics.
  5. J. Paul Dunne & Ron Smith & Dirk Willenbockel, 2005. "Models Of Military Expenditure And Growth: A Critical Review," Defence and Peace Economics, Taylor and Francis Journals, vol. 16(6), pages 449-461.
  6. Dunne, J. Paul & Smith, Ron P., 2007. "The Econometrics of Military Arms Races," Handbook of Defense Economics, Elsevier.
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Cited by:
  1. Alptekin, Aynur & Levine, Paul, 2010. "Military Expenditure and Economic Growth: A Meta-Analysis," MPRA Paper 28853, University Library of Munich, Germany.
  2. J Paul Dunne, 2011. "Military Keynesianism: An Assessment," Discussion Papers 1106, University of the West of England, Department of Economics.

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