Military Expenditure and Granger Causality: A Critical Review

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.Military spending, Economic growth, Causality, VAR,

Military expenditure and economic growth: A meta-analysis

“…See for instance Joerding (1986), Chowdhury (1991) Dakurah et al (2001, Abu-Bader and Abu-Qarn (2003), Dunne and Nikolaidou (2005), among others. For detailed discussion see Dunne and Smith (2010). 5 Some also apply the augmented Solow growth model, such as Knight et al (1996), andYakovlev (2007).…”

Military expenditure, economic growth and structural instability: a case study of South Africa

“…It uses Granger non-causality tests for this purpose for two reasons. First, because they allow the complexity of the underlying theoretical arguments to be avoided, by simply considering bivariate relations between military spending and economic growth (Dunne and Smith, 2010). Secondly, because they allow the use of recently developed tools to investigate structural stability.…”

The demand for military expenditure in authoritarian regimes

“…shown to impact on economic growth and development, as well as other economic variables such as international debt or corruption (see for example, Dunne et al, 2005;Collier and Hoeffler, 2006;Aizenman and Glick, 2006;Lin and Ali, 2009;Pieroni, 2009;Smyth and Narayan, 2009;Heo, 2010;Dunne and Smith, 2010;Alptekin and Levine, 2011;Kollias and Paleologou, 2013). Moreover, research has found that there may exist a trade-off between spending on the military and other areas such as health and education, the so-called guns-vs.-butter trade-off (see for example, Russet 1969;Deger 1985;Palmer 1990).…”