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Optimal Military Spending, Trade and Stochastic Economic Growth

  • Deng-Shan Wang

    (CEMA, Central University of Finance and Economics)

  • Yan Wang

    (CEMA, Central University of Finance and Economics)

  • Yifang Liu

    (School of Economics, Central University of Finance and Economics)

  • Heng-fu Zou

    (CEMA, Central University of Finance and Economics)

In this paper, based on dynamic programming we investigate the military spending, trade and wealth accumulation in a stochastic endogenous growth model. For the Cobb-Dauglas utility function, explicit solutions of the optimal problem in the home country are obtained, and the optimal consumptions of domestic goods and foreign goods, the share of domestic capital stock and foreign bond holdings are derived. The comparative dynamic analysis shows that when intertemporal substitution in consumption is relative elastic, the lower the foreign military spending, the higher variance of foreign military spending and lower volatility in the return of capital or bonds will result in lower consumption ratio and higher economic growth rate.

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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 373.

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Length: 17 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:cuf:wpaper:373
Contact details of provider: Web page: http://cema.cufe.edu.cn/

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  1. Pindyck, Robert S. & Solimano, Andres, 1993. "Economic instability and aggregate investment," Policy Research Working Paper Series 1148, The World Bank.
  2. van der Ploeg, F & de Zeeuw, A J, 1990. "Perfect Equilibrium in a Model of Competitive Arms Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 131-46, February.
  3. Deger, Saadet & Sen, Somnath, 1983. "Military expenditure, spin-off and economic development," Journal of Development Economics, Elsevier, vol. 13(1-2), pages 67-83.
  4. Abu-Bader, Suleiman & Abu-Qarn, Aamer S., 2003. "Government expenditures, military spending and economic growth: causality evidence from Egypt, Israel, and Syria," Journal of Policy Modeling, Elsevier, vol. 25(6-7), pages 567-583, September.
  5. Liutang Gong & Heng-fu Zou, 2001. "Military spending and stochastic growth," CEMA Working Papers 57, China Economics and Management Academy, Central University of Finance and Economics.
  6. Landau, Daniel, 1993. "The economic impact of military expenditures," Policy Research Working Paper Series 1138, The World Bank.
  7. Michael D. Intriligator & D. L. Brito, 1976. "Formal Models of Arms Races," Conflict Management and Peace Science, Peace Science Society (International), vol. 2(1), pages 77-88, February.
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