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Military spending and growth: a small open economy stochastic growth model

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  • Shin-Chyang Lee
  • Cheng-Te Lee
  • Shang-Fen Wu

Abstract

The paper analyzes the effects of military spending on economic growth in a small open stochastic endogenous growth model involving the supply-side and demand-side effects produced by military spending. We show that a rise in the military spending affects economic growth through four channels, including the crowding-out effect, the spin-off effect, the resource mobilization effect, and the portfolio effect. The net effect which depends on these four channels is ambiguous. Hence, we demonstrate that there exists an optimal defense burden that maximizes the economic growth rate.

Suggested Citation

  • Shin-Chyang Lee & Cheng-Te Lee & Shang-Fen Wu, 2016. "Military spending and growth: a small open economy stochastic growth model," Defence and Peace Economics, Taylor & Francis Journals, vol. 27(1), pages 105-116, February.
  • Handle: RePEc:taf:defpea:v:27:y:2016:i:1:p:105-116
    DOI: 10.1080/10242694.2015.1094881
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    Cited by:

    1. Jun Ando, 2018. "Externality of Defense Expenditure in the United States: A New Analytical Technique to Overcome Multicollinearity," Defence and Peace Economics, Taylor & Francis Journals, vol. 29(7), pages 794-808, November.

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