Testing behavior of defense expenditures in the NATO Countries: evidence from Fourier quantile unit root test

The defense expenditure is an essential part of government expenditures due to political preferences, geopolitical conditions, and level of economic development of a country. If one of them makes war risk for the country, governments tend to increase defense expenditures and the share of it in the budget will rise. In the literature, behavior of government expenditures is tried to explain via Peacock and Wiseman’s “displacement effect” hypothesis. The hypothesis claims that ratio of government expenditures to gross domestic product increases permanently when policy makers increase it once. So, if Peacock and Wiseman’s “displacement effect” hypothesis is valid, that would share of defense expenditures in the central government budget will rise and share of other expenditure items will decrease. Its socio-economic outcomes will be different. In this study, we aim to test behavior of defense expenditures of government in the NATO member countries to better understand how government manage expenditures. We modify “displacement effect” hypothesis by proportioning defense expenditures to gross domestic product. If it is not stationary, displacement effect hypothesis is valid, vice versa. Results imply that in most of the member countries displacement hypothesis for ratio of defense expenditures to GDP is valid, except Hungarian economy.