Military expenditure and granger causality: A critical review

Smith, Ron P.; Dunne, John Paul

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 auto regression, 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. © 2010 Taylor & Francis.

• Journal Article Type: Review
• Publication Date: Oct 1, 2010
• Deposit Date: Jan 6, 2011
• Publicly Available Date: Dec 2, 2016
• Journal: Defence and Peace Economics
• Print ISSN: 1024-2694
• Electronic ISSN: 1476-8267
• Publisher: Taylor & Francis (Routledge)
• Peer Reviewed: Peer Reviewed
• Volume: 21
• Issue: 5
• Pages: 427-441
• DOI: https://doi.org/10.1080/10242694.2010.501185
• Keywords: military spending, economic growth, causality, VAR
• Public URL: https://uwe-repository.worktribe.com/output/974467
• Publisher URL: http://dx.doi.org/10.1080/10242694.2010.501185
• Related Public URLs: http://carecon.org.uk/DPs/1007.pdf
• Additional Information: Additional Information : This is an electronic version of an article published in "Dunne, John Paul and Smith, Ron P (2010) Military expenditure and Granger causality: A critical review. Defence and Peace Economics, 21 (5-6). pp. 427-441". Defence and Peace Economics is available online at: http://www.informaworld.com/smpp/content~db=all?content=10.1080/10242694.2010.501185
• Contract Date: Dec 2, 2016