MILITARY EXPENDITURE AND GRANGER CAUSALITY: A CRITICAL REVIEW

John Dunne and Ronald Smith

Defence and Peace Economics, 2010, vol. 21, issue 5-6, 427-441

Abstract: A large literature has used tests for Granger (1969) non-causality, GNC, to examine the interaction of military spending with the economy. Such tests answer a specific although quite limited question: can one reject the null hypothesis that one variable does not help predict another? If one can reject, there is said to be Granger causality, GC. Although the limitations of GNC tests are well known, they are often not emphasised in the applied literature and so may be forgotten. This paper considers the econometric and methodological issues involved and illustrates them with data for the US and other countries. There are three main issues. First, the tests may not be informative about the substantive issue, the interaction of military expenditure and the economy, since Granger causality does not correspond to the usual notion of economic causality. To determine the relationship of the two notions of causality requires an identified structural model. Second, the tests are very sensitive to specification. GNC testing is usually done in the context of a vector autoregression, VAR, and the test results are sensitive to the variables and deterministic terms included in the VAR, lag length, sample or observation window used, treatment of integration and cointegration and level of significance. Statistical criteria may not be very informative about these choices. Third, since the parameters are not structural, the test results may not be stable over different time periods or different countries.

Keywords: Military spending; Economic growth; Causality; VAR (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/10242694.2010.501185 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Military Expenditure and Granger Causality: A Critical Review (2010)
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:5-6:p:427-441

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

DOI: 10.1080/10242694.2010.501185

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 ().