Defense–Growth Causality: Considerations of Regime-Switching and Time- and Country-Varying Effects

Tsai-Yuan Huang, Po-Chin Wu and Shiao-Yen Liu

Defence and Peace Economics, 2017, vol. 28, issue 5, 568-584

Abstract: This paper develops a panel smooth transition vector autoregressive model to investigate the economic growth–defense causality. This model simultaneously resolves the estimation problems of endogeneity, heterogeneity, and nonlinearity. Empirical results support that the causality is bidirectional, nonlinear, time- and country-varying. Economic growth has a negative impact on military spending and vice versa. The larger the HDI, the smaller the negative causality. Evidently, the increase in the level of country development can reduce the negative impact of military outlays on economic growth. Reducing the ratio of military spending to GDP is beneficial for countries with low HDI scores; however, moderately increasing the share of military expenditure is favorable for countries with extremely high HDI scores. Policy authority needs to set optimal education, health, and economic development shares of GDP for purchasing a maximum economic growth rate.

Date: 2017
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DOI: 10.1080/10242694.2016.1202002

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