Does Military Spending Spur Economic Growth? An Empirical Approach

Abstract

Abstract This study examines the complexities involved in calculating the impact of military spending on economic growth, as well as the reasons for the lack of consensus in the academic literature. It explores econometric approaches for panels and provides a brief overview of economic theory, highlighting the difficult identification challenges involved in identifying the connection between military expenditures and output. Using the enlarged SIPRI military spending data, a relatively large and balanced panel of nations for the period 1960-2014 is constructed. Rather than focusing on the direct relationship between military spending and economic growth, this paper emphasizes the investment channel. It presents estimates of various models analyzing the interaction between the three variables and concludes that the data do not indicate strong relationships between military expenditure and investment or growth. Given the identified theoretical and economic issues, this is not unexpected.