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The impact of military spending on economic growth: A threshold regression analysis

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  • Banerjee, Anindya
  • Karavias, Yiannis
  • Wang, Lijun

Abstract

The question of how military spending affects economic growth has never been more pressing than in the past 30 years, given the rising geopolitical tensions across the globe. Yet the answer to this question has proven elusive, mostly due to two salient characteristics of the data which are present at the same time: endogeneity and nonlinearity. This paper utilises a state of the art panel data threshold regression model that allows for both features, simultaneously. We find that for the full sample of countries the relationship between military spending and eco- nomic growth is positive up to the estimated threshold of 2.017% of GDP, and then becomes significantly weaker. For NATO countries however, the relationship is always negative, which explains the reluctance to follow the treaty’s minimum military spending requirements.

Suggested Citation

  • Banerjee, Anindya & Karavias, Yiannis & Wang, Lijun, 2023. "The impact of military spending on economic growth: A threshold regression analysis," MPRA Paper 124684, University Library of Munich, Germany, revised 09 Sep 2024.
    • Handle: RePEc:pra:mprapa:124684
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

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