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The Defence-Debt Nexus: Evidence From The High-Income Members Of Nato

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  • W. Robert J. Alexander

Abstract

The literature in defence economics has tended to focus on the relationship between defence spending and economic growth. Studies examining the linkage between defence spending and government debt have been relatively rare. Given the recent Global Financial Crisis, originating in the developed economies, and the changed international security picture since 9/11, it is timely to reconsider the defence-debt nexus in the rich economies. This study pays particular attention to developing an empirical strategy which is both soundly based on economic theory concerning the evolution of public debt and which uses econometric methods that are welladapted to the dynamic aspects of the relationship. From the standpoint of economic theory, if a government seeks to minimize the distortionary costs of taxation, then taxation will follow a random walk. Unexpected shocks (war and recession) will cause debt. Other idiosyncratic national-level political considerations that affect the evolution of debt can be factored out by the use of a dynamic panel estimation method. Employing the Arellano--Bond dynamic panel model to the data available from members of the Organization for Economic Co-operation and Development and North Atlantic Treaty Organization over the periods 1988--2009 and 1999--2009, this study finds that the defence burden is a statistically significant and economically important determinant of public debt.

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  • W. Robert J. Alexander, 2013. "The Defence-Debt Nexus: Evidence From The High-Income Members Of Nato," Defence and Peace Economics, Taylor & Francis Journals, vol. 24(2), pages 133-145, April.
  • Handle: RePEc:taf:defpea:v:24:y:2013:i:2:p:133-145
    DOI: 10.1080/10242694.2012.673839
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    References listed on IDEAS

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    1. Marco Battaglini & Stephen Coate, 2008. "A Dynamic Theory of Public Spending, Taxation, and Debt," American Economic Review, American Economic Association, vol. 98(1), pages 201-236, March.
    2. Torsten Persson & Lars E. O. Svensson, 1989. "Why a Stubborn Conservative would Run a Deficit: Policy with Time-Inconsistent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 325-345.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-578, May.
    4. J. Paul Dunne a,† & Sam Perlo-Freeman ‡ & Aylin Soydan §, 2004. "Military expenditure and debt in South America," Defence and Peace Economics, Taylor & Francis Journals, vol. 15(2), pages 173-187, April.
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    Cited by:

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    2. Caruso Raul & Di Domizio Marco, 2015. "The Impact of US Military Spending on Public Debt in Europe (1992–2013): A Note," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 21(4), pages 459-466, December.
    3. Carla Norrlof & William C. Wohlforth, 2019. "Is US grand strategy self-defeating? Deep engagement, military spending and sovereign debt," Conflict Management and Peace Science, Peace Science Society (International), vol. 36(3), pages 227-247, May.

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