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Defence Expenditure and Macroeconomic Stabilization: Causality Evidence from Pakistan

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  • Mahmood ul Hasan Khan

    (State Bank of Pakistan)

Abstract

The objective of this study is to investigate the plausibility of using defence expenditure as a macroeconomic stabilization tool (referred as Military Keynesianism Hypothesis) in case of Pakistan. Johansen’s co-integration techniques are used followed by the vector error correction modeling (VECM). Various parametric restrictions on VECM were tested to discern the Granger causal chains among defence spending, development expenditure, CPI and income. Using annual time series data from FY51 to FY03, we found a long-run relationship among the variables. The results tend to favor a long-run bi-directional causality among the variables. However, this temporal dependence does not hold in the short-run, as the lagged differences of defence expenditures do not significantly explain GDP and inflationary dynamics. These seemingly contrasting results for the short-run and long-run causality suggest that although MKH does not hold over the estimation period, long-run economic growth is not hurt by defence expenditure.

Suggested Citation

  • Mahmood ul Hasan Khan, 2004. "Defence Expenditure and Macroeconomic Stabilization: Causality Evidence from Pakistan," SBP Working Paper Series 06, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:06
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    File URL: http://www.sbp.org.pk/repec/sbp/wpaper/wp06.pdf
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    References listed on IDEAS

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    1. Jean-Marie Dufour & Eric Renault, 1998. "Short Run and Long Run Causality in Time Series: Theory," Econometrica, Econometric Society, vol. 66(5), pages 1099-1126, September.
    2. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    3. Masih, Rumi & Masih, Abul M. M., 1996. "Macroeconomic activity dynamics and Granger causality: New evidence from a small developing economy based on a vector error-correction modelling analysis," Economic Modelling, Elsevier, vol. 13(3), pages 407-426, July.
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    Cited by:

    1. Luqman, Muhammad & Antonakakis, Nikolaos, 2021. "Guns better than butter in Pakistan? The dilemma of military expenditure, human development, and economic growth," Technological Forecasting and Social Change, Elsevier, vol. 173(C).
    2. Fiaz Hussain & Shahzad Hussain & Naila Erum, 2015. "Are Defense Expenditures Pro Poor or Anti Poor in Pakistan? An Empirical Investigation," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 54(4), pages 875-894.

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    More about this item

    Keywords

    Stabilization; Defence expenditures; military keynesianism hypothesis; causality.;
    All these keywords.

    JEL classification:

    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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