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Military Spending and Inequality: Panel Granger Causality Test

  • Lin, Eric S.
  • Ali, Hamid E.

The relationship between military spending and economic inequality is not well documented within the empirical literature, while numerous studies have uncovered the linkages between military spending and other macroeconomic variables, such as economic growth, unemployment, purchasing power parity, black market premium, poverty and investment. The purpose of this article is to examine the causal relationship between military spending and inequality using BVC and SIPRI data across 58 countries from 1987 to 1999. Panel unit root tests indicate that two inequality measures (Theil and EHII) under consideration are likely to be non-stationary. The authors' work addresses the adverse implications of modeling with non-stationary variables, since this omission casts serious doubt on the reliability of the relationship between military spending and inequality. The recent developed panel Granger non-causality tests provide no evidence to support the causal relationship in either direction between the military spending and the change in economic inequality. The results are consistently robust to alternative data sources for military spending, to alternative definitions of the inequality measures, to the log transformation of the military spending, to the deletion of some data points, and to the division of OECD and non-OECD countries. Finally, the impulse responses and variance decompositions based on the panel vector autoregressive regression model are consistent with the findings relied on Granger non-causality tests.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40159.

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Date of creation: 2009
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Publication status: Published in Journal of Peace Research September.46(2009): pp. 671-685
Handle: RePEc:pra:mprapa:40159
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  1. Mohsen Bahmani-Oskooee & Gour Gobinda Goswami, 2005. "Military spending as another cause of the failure of the PPP," Applied Economics Letters, Taylor & Francis Journals, vol. 12(11), pages 663-667.
  2. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  3. Venet, Baptiste & Hurlin, Christophe, 2001. "Granger Causality Tests in Panel Data Models with Fixed Coefficients," Economics Papers from University Paris Dauphine 123456789/6159, Paris Dauphine University.
  4. Gradstein, Mark & Milanovic, Branko & Ying, Yvonne, 2001. "Democracy and income inequality : an empirical analysis," Policy Research Working Paper Series 2561, The World Bank.
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  6. Mohsen Bahmani-Oskooee & Gour Goswami, 2006. "Military spending and the black market premium in developing countries," Review of Social Economy, Taylor & Francis Journals, vol. 64(1), pages 77-91.
  7. Christophe Hurlin & Elena Dumitrescu, 2012. "Testing for Granger Non-causality in Heterogeneous Panels," Working Papers halshs-00224434, HAL.
  8. Julide Yildirim & Selami Sezgin & Nadir Ocal, 2005. "Military Expenditure And Economic Growth In Middle Eastern Countries: A Dynamic Panel Data Analysis," Defence and Peace Economics, Taylor & Francis Journals, vol. 16(4), pages 283-295.
  9. Christophe Hurlin, 2005. "Un test simple de l'hypothèse de non-causalité dans un modèle de panel hétérogène," Revue économique, Presses de Sciences-Po, vol. 56(3), pages 799-809.
  10. Granger, Clive W. J., 2003. "Some aspects of causal relationships," Journal of Econometrics, Elsevier, vol. 112(1), pages 69-71, January.
  11. Julide Yildirim & Selami Sezgin, 2003. "Military expenditure and employment in Turkey," Defence and Peace Economics, Taylor & Francis Journals, vol. 14(2), pages 129-139.
  12. Charles M. Beach, 1974. "Cyclical Sensitivity of Aggregate Income Inequality," Working Papers 162, Queen's University, Department of Economics.
  13. Robert Hoffmann & Chew-Ging Lee & Bala Ramasamy & Matthew Yeung, 2005. "FDI and pollution: a granger causality test using panel data," Journal of International Development, John Wiley & Sons, Ltd., vol. 17(3), pages 311-317.
  14. Paul Dunne & Duncan Watson, 2000. "Military expenditure and employment in South Africa," Defence and Peace Economics, Taylor & Francis Journals, vol. 11(4), pages 587-596.
  15. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  16. Jurgen Brauer, 2007. "Data, Models, Coefficients: The Case of United States Military Expenditure," Conflict Management and Peace Science, Peace Science Society (International), vol. 24(1), pages 55-64, February.
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