Military Spending Response to Defense Shocks? International Evidence

All preceding studies that investigate the consequences of "defense news" shocks (like war or terrorism) on military spending assumed a permanent deviation from its growth path. Using 25 years of military spending annual data for more than hundred high, middle and low countries (based on the definitions of income levels suggested by the World Bank), this paper provide new evidence on the effect of exogenous shocks on military spending. By employing more powerful panel unit root tests that accounts for both cross-sectional dependence across countries and structural breaks, we find robust evidence supporting the stationarity of military spending for all the panels (full, high, middle and low income countries) highlighting that any exogenous shock to military spending has a temporary effect, meaning that military spending will return to its time trend. The stationary characteristic of military spending is fundamental for forecasting defence budget in response to exogenous shocks (terrorism and military conflicts).