THE EFFECT OF DEFENSE SPENDING ON US OUTPUT: A FACTOR AUGMENTED VECTOR AUTOREGRESSION (FAVAR) APPROACH

Rangan Gupta, Alain Kabundi () and Emmanuel Ziramba

Defence and Peace Economics, 2010, vol. 21, issue 2, 135-147

Abstract: Empirical evidence on the effect of defense spending on US output is at best mixed. Against this backdrop, this paper assesses the impact of a positive defense spending shock on the growth rate of real GNP using a Factor Augmented Vector Autoregressive (FAVAR) model estimated with 116 variables spanning the quarterly period of 1976:01 to 2005:02. Overall, the results show that a positive shock to the growth rate of the real defense spending translates to a positive short-run effect on the growth rate of real GNP lasting up to ten quarters, but the effect is significant only for two quarters. Beyond the tenth quarter, the effect becomes negative and shows signs of slow reversal at around the 17th quarter. Our results tend to indicate that the mixed empirical evidence, based on small-scale Vector Autoregressive (VAR) and Vector Error Correction (VEC) models, could be a result of a small information set not capturing the true theoretical relationships between the two variables of interest.

Keywords: Defense spending; Output; FAVAR (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/10242690903569056 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: THE EFFECT OF DEFENSE SPENDING ON US OUTPUT: A FACTOR AUGMENTED VECTOR AUTOREGRESSION (FAVAR) APPROACH (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:defpea:v:21:y:2010:i:2:p:135-147

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/GDPE20

DOI: 10.1080/10242690903569056

Access Statistics for this article

Defence and Peace Economics is currently edited by Professor Keith Hartley

More articles in Defence and Peace Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().