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Military Expenditure and Economic Activity: The Colombian Case

  • Arias Andrés F.

    ()

  • Laura Ardila
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    We enhance a standard RBC model to account for military expenditure and the costs of an internal conflict or war. The model captures the natural trade-off in military expenditure: crowding out of private consumption and investment but less destruction (and, therefore, higher marginal productivity) of private capital (and labor). Hence, military expenditure below (above) a certain threshold generates a positive (negative) net benefit in terms of output. The model is calibrated to an annual frequency using Colombian data. We find that an increase in military expenditure of 1% GDP (the current policy of Colombian authorities) increases investment and output above the steady state during several periods, before the shock fades away. Even though consumption falls on impact (to open up space for the additional military expenditure and private investment), it increases above its stationary trend after three periods, remains on positive grounds thereafter, and the cumulated net gain is positive.

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    File URL: http://economia.uniandes.edu.co/revistadys/52/02_Military.pdf
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    Article provided by UNIVERSIDAD DE LOS ANDES-CEDE in its journal REVISTA DESARROLLO Y SOCIEDAD.

    Volume (Year): (2003)
    Issue (Month): ()
    Pages:

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    Handle: RePEc:col:000090:003895
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    1. Collier, Paul & Hoeffler, Anke, 1998. "On Economic Causes of Civil War," Oxford Economic Papers, Oxford University Press, vol. 50(4), pages 563-73, October.
    2. Joshua Aizenman & Reuven Glick, 2003. "Military expenditure, threats, and growth," Working Paper Series 2003-08, Federal Reserve Bank of San Francisco.
    3. Knight, Malcolm & Loayza, Norman & Villanueva, Delano, 1996. "The peace dividend : military spending cuts and economic growth," Policy Research Working Paper Series 1577, The World Bank.
    4. Daniel Mejía & Carlos Posada, . "Capital Destruction, Optimal Defense and Economic Growth," Borradores de Economia 257, Banco de la Republica de Colombia.
    5. Kosuke Imai & Jeremy M. Weinstein, 2000. "Measuring the Economic Impact of Civil War," CID Working Papers 51, Center for International Development at Harvard University.
    6. Michael D. Stroup & Jac C. Heckelman, 2001. "Size Of The Military Sector And Economic Growth: A Panel Data Analysis Of Africa And Latin America," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 329-360, November.
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