Defense spending and economic growth: Extended empirical analysis for the European Union

Abstract

Previous empirical studies on the defense spending-economic growth nexus such as Kollias et al. (2007), Mylonidis (2008), Dunne and Nikolaidou (2012) analyzed this relationship in the case of the EU15. This study extends the analysis with the inclusion of more EU members and investigates the long run causal ordering between the two variables. Findings reported herein are not uniformed across all EU members. It is also found that end of Cold War has significant negative impact on defense expenditures of former east-European countries.

Keywords:

• Defense spending
• Economic growth
• Cointegration
• Causality
• EU

JEL Codes:

• C22
• H56

ACKNOWLEDGEMENTS

We gratefully acknowledge the constructive and helpful recommendations of Editor Christos Kollias. We also wish to thank anonymous reviewer for his/her valuable comments. Any remaining errors are the authors’ own responsibility.

Notes

1 The dataset of the study dates back to 1973 which is oldest available. However, this study contains 21 members because data for the Czech Republic, Estonia, Latvia, Lithuania, Slovakia and Slovenia are generally not available prior to the late 1980s or early 1990s.

2 Since defence spending data could not be found in Euros for all the countries in our sample, the data used is measured in US dollars.

³Schwarz Information Criterion (SIC) was used in order to determine optimum length for each country. With respect to SIC, lag lengths are determined as two for Belgium, Denmark, Poland, Romania and one for the rest of the countries.

⁴‘k’ is optimal lag length and ‘d(max)’ is the optimal order of integration for the series in system. ‘k + d_MAX’ is defined as ‘v’ in Equations (9) and (10).

⁵It is possible to determine ‘k’ and ‘d’ by considering information criteria and unit root testing procedure respectively.