Shahbaz, Muhammad and Afza, Talat and Shabbir, Shahbaz Muhammad (2011): Does defence spending impede economic growth? cointegration and causality analysis for Pakistan.
Download (184Kb) | Preview
This study revisits the relationship between defence spending and economic growth using Keynesian model in Pakistan by applying ARDL bounds testing approach to cointegration for long run and error correction method for short span of time. Empirical evidence suggests a stable cointegration relationship between defence spending and economic growth. An increase in defence spending retards the pace of economic growth confirming the validation of Keynesian hypothesis in the country. Current economic growth is positively linked with economic growth in previous period while rise in nonmilitary expenditures boosts economic growth. Interest rate is inversely associated with economic growth. Finally, unidirectional causality running from military spending to economic growth is found.
|Item Type:||MPRA Paper|
|Original Title:||Does defence spending impede economic growth? cointegration and causality analysis for Pakistan|
|Keywords:||Defence Spending, Economic Growth, Cointegration, Causality, Pakistan|
|Subjects:||B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B22 - Macroeconomics|
|Depositing User:||Muhammad Shahbaz|
|Date Deposited:||12. May 2011 12:20|
|Last Modified:||12. Feb 2013 09:45|
Abu-Bader, S. and Abu-Qarm A. (2003) Government Expenditures, Military Spending and Economic Growth: Causality Evidence from Egypt, Israel and Syria. Journal of Policy Modelling 25(6-7), pp. 567-583.
Abu-qarn, A. S. (2010) The Defence-Growth Nexus Revisited: Evidence from the Israeli-Arab Conflict. Defence and Peace Economics 21(4), pp. 291-300.
Atesoglu, H. S. (2002) Defense Spending Promotes Aggregate Output in the United States: Evidence from Cointegration Analysis. Defence and Peace Economics 13 (1), pp. 55-60.
Atesoglu, H. S. (2009) Defense Spending and Aggregate Output in the United States. Defence and Peace Economics 20(1), pp. 21-26.
Banerjee, A. and Newman, A. (1993) Occupational Choice and the Process of Development. Journal of Political Economy 101(2), pp. 274-298.
Bannerjee, A., J. Dolado and Mestre, R. (1998). Error-correction Mechanism Tests for Cointegration in Single Equation Framework. Journal of Time Series Analysis 19(3), pp. 267-283.
Barro, R. J., (1991) Economic Growth in a Cross-Section of Countries. Quarterly Journal of Economics 106(2), pp. 407-443.
Bas, M. A. (2005) Military Spending, Investment and Economic Growth: Relaxing The Linearity Assumption, Working Paper, University of Rochester 1-36.
Benoit, E. (1978) Growth and Defense in Developing Countries. Economic Development and Cultural Change 26 (2), pp. 271-287.
Benoit, E., (1973) Defense and Economic Growth in Developing Countries. Boston: Heath and Co., Lexington Books.
Bhargava, A. (1986) On the Theory of Testing for Unit Roots in Observed Time Series. The Review of Economic Studies 53(3), pp. 369-384.
Birdi, A. and Dunne, J. P. (2002) An Econometric Analysis of Military Spending and Economic Growth in South Africa. Chapter 9 in Jurgen Brauer and J Paul Dunne (eds) (2002) "The Economics of Military Expenditures, Arms Production and Trade in Developing Countries". Palgrave.
Biswas, B. and Ram, R. (1986) Military Expenditures and Economic Growth in Less Developed Countries: An Augmented Model and Further Evidence. Economic Development and Cultural Change 34(2), pp. 361–372.
Biswas, B. and Ram, R., (1986) Military Expenditures and Economic Growth in Less Developed Countries: An Augmented Model and Further Evidence. Economic Development and Cultural Change 34(2), pp. 361-372.
Boretsky, M., (1975), Trends in U.S. Technology: A Political Economist’s View.American Scientist 63(70), pp. 70-82.
Cappelen, A., Gleditsch, N. P and Bjerkholt, O. (1984) Military Spending and Economic Growth in the OECD Countries. Journal of Peace Research 21(4), pp.361–373.
Chowdhury, A. R. (1991) A Causal Analysis of Defense Spending and Economic Growth. The Journal of Conflict Resolution 35(1), pp. 80–97.
Cuaresma, J. C and Reitschuler, G. (2004) A Non-linear Defence-Growth Nexus? Evidence from the US Economy. Defence and Peace Economics 15(1), pp. 71-82.
d'Agostino, G., Pieroni, L and Dunne, J. P. (2010). Assessing the Effects of Military Expenditure on Growth. University of the West of England, Department of Economics, Discussion Papers 1012.
Dakurah, A.H., Davies, S.P. and Sampath, R. K. (2001) Defense Spending and Economic Growth in Developing Countries: A Causality Analysis. Journal of Policy Modelling 23(6), pp. 651–658.
Deger, S. (1986) Economic Development and Defense Expenditures. Economic Development and Cultural Change 35(1), pp. 179-196.
Deger, S. and Smith, R. (1983) Military Expenditure and Growth in less Developed Countries. Journal of Conflict Resolution 27(2), pp. 335–353.
Dejong, D.N., Nankervis, J.C., Savin, N. E. (1992) Integration versus Trend Stationarity in Time Series. Econometrica 60(2), pp. 423-433.
Dickey, D and Fuller, W. A. (1979) Distribution of the Estimates for Autoregressive Time Series with Unit Root. Journal of the American Statistical Association 74(366), pp. 427-431.
Dickey, D. A and Fuller, W. A (1981) Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root. Econometrica 49(4), pp. 1057-1072.
Dunne, J. P, Nikolaidou, E. and Smith, R. (2002) Military Spending Investment and Economic Growth in Small Industrialising Economies. The South African Journal of Economics 70(5), pp. 789-790.
Dunne, J. P. and Uye, M. (2009) Military Spending and Development. University of the West of England, Department of Economics, Discussion Papers no. 0902.
Dunne, J. P., Nikolaidoua, E. and Vougas, D. (2001) Defence Spending and Economic Growth: A Causal Analysis for Greece and Turkey. Defence and Peace Economics 12(1), pp. 5–26.
Dunne, J. P., Smith, R and Willenbockel, D. (2005) Models of Military Expenditure and Growth: A Critical Review. Defence and Peace Economics 16(6), pp. 449-461.
Elliot, G., Rothenberg, T. J., Stock, J. H. (1996) Efficient Tests for an Autoregressive Unit Root. Econometrica 64(4), pp. 813-836.
Engle, RF and Granger, C. W. J. (1987) Cointegration and Error Correction Representation: Estimation and Testing. Econometrica 55(2), pp. 251-276.
Faini, R., Annez, P. and Taylor, L. (1984) Defense Spending, Economic Structure, and Growth: Evidence among Countries and over time. Economic Development and Cultural Change 32(3), pp. 487–498.
Feder, G. (1982) On Exports and Economic Growth. Journal of Development Economics 12 (1/2), pp. 59–73.
Feridun, M and Shahbaz, M. (2010) Fighting Terrorism: Are Military Measures Effective? Empirical Evidence from Turkey. Defence and Peace Economics 21(2), pp. 193-205.
Fredericksen, P.C. and Looney, R. E. (1982) Defense Expenditures and Economic Growth in Developing Countries: Some Further Empirical Evidence. Journal of Economic Development 7(1), pp. 113-124.
GoP (2008-09), Economic Survey of Pakistan, published by Ministry of Finance,Islamabad. Pakistan.
Gupta, S., Clements, B., Bhattacharya, R., and Chakravarti, S. (2004) Fiscal Consequences of Armed Conflict and Terrorism in Low and Middle Income Countries. European Journal of Political Economy 20(2), pp. 403-421.
Gupta. R, Kabundi. A and Ziramba, E. (2010) The Effect of Defense Spending on the US Output: A Factor Augmented Vector Autoregression (FAVAR) Approach. Defence and Peace Economics 21(2), pp. 135-147.
Halicioglu, F. (2003) An Econometrical Analysis of Effects of Aggregate Defence spending on Aggregate Output, METU International Conference in Economics/ VII September 6-9, 2003, Ankara, Turkey.
Halicioglu, F. (2004) Defense Spending and Economic Growth in Turkey: An Empirical Application of new Macroeconomic Theory. Review of Middle East Economics and Finance 2(3), pp. 193-201.
Harris, R., and Sollis, R. (2003). Applied Time Series Modelling and Forecasting, Wiley, West Sussex.
Johansen, S. (1991) Estimation and Hypothesis Testing of Cointegrating Vectors in Gaussian Vector Autoregressive Models. Econometrica 59(6), pp. 1551–1580.
Johansen, S. (1992) Cointegration in partial systems and the efficiency of singleequation analysis. Journal of Econometrics 52(3), pp. 389-402.
Johansen. S and Juselius, K (1990) Maximum Likelihood Estimation and Inference on Cointegration with Applications to the Demand for Money. Oxford Bulletin of Economics and Statistics 52(2), pp. 169-210.
Joseph, M and Sinha, D. (2007) Does Black’s Hypothesis for Output Variability Hold for Mexico?, MPRA Paper 4021, University Library of Munich, Germany.
Karagol, E. (2006). The Relationship between External Debt, Defence Expenditures and GNP Revisited: The Case of Turkey. Defence and Peace Economics 17(1), pp. 47-57.
Karagol. E and Palaz, S. (2004) Does Defence Expenditure Deter Economic Growth in Turkey? A Cointegration Analysis. Defence and Peace Economics 15(3), pp. 289-298.
Keller, K ., Poutvaara, P and Andreas, W. (2009) Military Draft and Economic Growth in OECD Countries. Defence and Peace Economics 20(5), pp. 373-393.
Kennedy, G. (1974). The Military in the Third World, Duckworth, London.
Khan, M-H. (2004) Defence Expenditure and Macroeconomic Stabilization: Causality Evidence from Pakistan. SBP Working Paper Series 6, 1-17.
Khilji, N. M and Mahmood, A. (1997) Military Expenditures and Economic Growth in Pakistan. The Pakistan Development Review 36(4), pp. 791-808.
Klein, T. (2004) Military Expenditure and Economic Growth: Peru 1970-1996. Defence and Peace Economics 15 (3), pp. 275-288.
Kollias, C. G. (1995). Preliminary Findings on the Economic Effects of Greek Military Expenditure. Applied Economics Letters 2(1), pp. 16-18.
Kollias, C., Mylonidis, N. and Paleologou, S. (2007) A Panel Data Analysis of the Nexus between Defence Spending and Growth in The European Union. Defence and Peace Economics 18(1), pp. 75-85.
Laurenceson, J and Chai, J. C. H. (2003) Financial Reform and Economic Development in China, Cheltenham, UK, Edward Elgar.
Lee, C-C and S-T, Chen. (2007) Do Defence Expenditures Spur GDP? A Panel Analysis from OECD and Non-OECD Countries. Defence and Peace Economics 18(3), pp. 265-280.
Lim, D. (1983) Another Look at Growth and Defense in Less Developed Countries. Economic Development and Cultural Change 31(2), pp. 377–384.
MacKinnon, J. G. (1996) Numerical Distribution Functions for Unit Root and Cointegration Tests. Journal of Applied Economics 11(6), pp. 601–618.
MacNair, E., Murdoch, C and Sandler, T. (1995) Growth and Defense: Pooled Estimates for the NATO Alliance, 1951-1988. Southern Economic Journal 61(3),pp. 846–860.
Mueller, M. J and Atesoglu, H. S. (1993) Defense Spending, Technological Change and Economic Growth in the United States. Defence and Peace Economics 4(3), pp. 259–269.
Mylonidis, N. (2008) Revisiting the Nexus between Military Spending and Growth in the European Union. Defence and Peace Economics 19(4), pp. 265-272.
Narayan, P. K and Singh, S. (2007) Modelling the Relationship between Defense Spending and Economic Growth for the Fiji Islands. Defence and Peace Economics 18(4), pp. 391-401.
Ng, S and Perron, P. (2001) Lag Length Selection and the Construction of Unit Root Test with Good Size and Power. Econometrica 69(6), pp. 1519-1554.
Ocal, N and Brauer, J. (2007) Asymmetric Effects of U. S Military Expenditure on U. S Aggregate Output, Unpublished manuscript, Department of Economics, Augusta State University.
Ouattara, B. (2004) Foreign Aid and Fiscal Policy in Senegal, University of Manchester, Manchester, UK.
Özsoy, O. (2008) Defence Spending and The Macroeconomy: The Case of Turkey. Defence and Peace Economics 19(3), pp. 195-208.
Ozsoy, O., 2000, The Defence Growth Relation: Evidence from Turkey. In: The Economics of Regional Security: NATO, the Mediterranean, Southern Africa, edited by Jurgen Brauer and Keith Hartley (Amsterdam: Harwood Academic Publishers), pp. 139–159.
Pesaran, M. H., Shin, Y. and Smith, R. J. (2001) Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics 16(3), pp.289-326.
Phillips, P C B and Moon, H. R. (2001) Nonstationary Panel Data Analysis: An Overview and Some Recent Developments. Econometric Reviews 19(3), pp. 263-286.
Phillips, P. C. B and P. Perron (1988) Testing for a Unit Root in Time Series Regression. Biometrika 75(2), pp. 335-346.
Pieroni, L. (2009) Military Expenditure and Economic Growth. Defence and Peace Economics 20(4), pp. 327-339.
Ram, R. (1986) Government Size and Economic Growth: A New Framework and some Evidence from Cross-section and Time-series Data. American Economic Review 76(1), pp. 191-203.
Ram, R. (1995) Defense Expenditure and Economic Growth. In Handbook of Defense Economics, Vol 1, edited by K. Hartley and T. Sandler. Oxford: Elsevier, 251–273.
Romer, D. (2000) Keynesian Macroeconomics without the LM Curve, NBER Working Paper no. 7461.
Sandler, T. and Hartley, K. (1995) Defence Economics. Oxford University Press.
SBP (2008-09), Statistical Bulletin of State Bank of Pakistan, Karachi. Pakistan.
Sezgin, S. (1997) Country Survey X: Defence Spending in Turkey Defence and Peace Economics 8(4), pp. 381-409.
Sezgin, S. (1999) Defence Expenditure and Economic Growth in Turkey and Greece: A Disaggregated Analysis, Paper presented at the Arms Trade, Security, and Conflict Conference, Middlesex University Business School, London, June 11–12.
Sezgin, S. (2000) A Causal Analysis of Turkish Defence Growth Relationships: 1924-1996. Ankara University Journal of Political Sciences 55(2), pp. 113–124.
Sezgin, S. (2000) An Empirical Analysis of Turkeys Defense – Growth Relationship with a Multi-Equation Model. Defense and Peace Economics 11(1),pp. 63-80.
Sezgin, S. (2001) An Empirical Analysis of Turkey's Defence-Growth Relationships with a Multi-equation Model (1956–1994). Defence and Peace Economics 12(1), pp. 69-81.
Shahbaz, M. (2010) Income Inequality-Economic growth and Non-Linearity: A Case of Pakistan. International Journal of Social Economics 37(9), pp. 613-636.
Sivard, R. L. (1977) World Military and Social Expenditure. Leesburg, VA:WMSE Publications.
Smith, J. S and Tuttle, M. H. (2008) Does Defense Spending Really Promote Aggregate Output in the United States? Defense and Peace Economics 19(6), pp.435-447.
Smith, R. P. (1977) Military Expenditure and Capitalism. Cambridge Journal of Economics 1(1), pp. 61-76.
Starr, H., F. W. Hoole, J. A. Hart, and Freeman, J. R. (1984) The Relationship between Defense Spending and Inflation. Journal of Conflict Resolution 28(1), pp.103-122.
Stewart, D. B. (1991) Economic Growth and the Defence Burden in Africa and Latin America: Simulations from a Dynamic Model. Economic Development and Cultural Change 40(1), pp. 189–207.
Stock, J. H. and Watson, M. (1993) A Simple Estimator of Cointegrating Vectors in Higher Order Integrated System. Econometrica 61(4), pp. 783-820.
Tahir, R. (1995) Defence Spending and Economic Growth: Re-examining the Issue of Causality for Pakistan and India. The Pakistan Development Review 34(4), pp. 1109-1117.
Tang, C F. (2008) Defence Expenditure and Economic Growth in Malaysia: A Reassessment Using Bounds and Modified Wald Tests. The IUP Journal of Public Finance 1(2), pp. 45-51.
Taylor, J. B. (2000) Teaching Modern Macroeconomics at the Principles Level. American Economic Review 90(2), pp. 90–94.
Ward, M.D., Davis, D., Penubarti, M., Rajmaira, S. and Cochran, M. (1991)Military Spending in India – Country Survey. Defence and Peace Economics 3(1),pp. 41–63.
Whynes, D. K. (1979) The Economics of Third World Military Expenditure. Palgrave Macmillan. London.
Wijeweera, A. and Webb, M. J. (2009) Military Spending and Economic Growth in Sri Lanka: A Time Series Analysis. Defence and Peace Economics 20(6), pp.499-508.
Yildirim. J and Öcal, N. (2006) Arms Race and Economic Growth: The Case of India and Pakistan. Defence and Peace Economics 17(1), pp. 37-45.
Yildirim. J, S. Sezgin and Öcal, N. (2005) Military Expenditure and Economic Growth in Middle Eastern Countries: A Dynamic Panel Data Analysis. Defence and Peace Economics 16(4), pp. 283-295.