The Determinants of Defense Spending in the Gulf Region: Evidence from Seemingly Unrelated Regressions

A. Talha Yalta and Yasemin Yalta ()
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Yasemin Yalta: Hacettepe University

No 1455, Working Papers from Economic Research Forum

Abstract: We examine the determinants of demand for military expenditures in the Gulf Region (Saudi Arabia, Iran, Iraq, Kuwait, Bahrain, Qatar, UAE, and Oman) by using a partial adjustment model in a panel setting estimated with the seemingly unrelated regressions (SUR) approach. Our model takes into consideration institutional inertia as well as intercountry correlations, both observed and unobserved. In addition to economic variables, we also consider a series of strategic variables to shed light on issues such as free riding and spill in effects. Our findings based on annual data between 1980 and 2016 indicate that military expenditures are influenced by both economic and strategic factors with a high degree of heterogeneity across different countries. While some countries respond more to economic factors, others exhibit more sensitivity to strategic factors.

Pages: 22
Date: 2021-01-20, Revised 2021-01-20
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