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Military Expenditure, Economic Growth and Structural Instability: A Case Study of South Africa

  • Goodness C. Aye

    ()

    (Department of Economics, University of Pretoria)

  • Mehmet Balcilar

    ()

    (Department of Economics, Eastern Mediterranean University, Famagusta, North Cyprus,via Mersin 10, Turkey)

  • John P. Dunne

    ()

    (School of Economics, University of Cape Town, Cape Town, South Africa)

  • Rangan Gupta

    ()

    (Department of Economics, University of Pretoria)

  • Renee van Eyden

    ()

    (Department of Economics, University of Pretoria)

This paper makes two contributions to the growing literature on the military expenditureeconomic growth nexus. It provides a case study of a developing country, South Africa, and considers the possibilities of structural breaks in the relationship, applying newly developed econometric methods. Taking annual data from 1951 to 2010 and using full sample bootstrap Granger non-causality tests, no Granger causal link is found between military expenditure and GDP. Then, using parameter instability tests, the estimated VARs are found to be unstable and when a bootstrap rolling window estimation procedure is used to deal with time variation in the parameters, bidirectional Granger causality between the two series becomes evident in various subsamples. While military expenditure has positive predictive power for GDP at certain initial periods, it has negative predictive power at some later periods in the sample. Similar results were obtained for the causality running from GDP to military expenditure. These findings illustrate that conclusions based on the standard Granger non-causality tests, which neither account for structural breaks nor time variation in the relationship may be invalid.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201344.

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Length: 21 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:pre:wpaper:201344
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Web page: http://www.up.ac.za/economics

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