| Publication |
2008.
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| Summary/Abstract |
Many studies have examined the relationship between defense spending and growth in real aggregate output with mixed results. Most recently, Atesoglu (2002) finds a positive relationship between defense spending and output. Capturing the error correction term as the long run adjustment parameter and including the long run adjustment in the relationship, we do not find evidence that defense spending promotes growth in real output. Instead, defense spending responds to aggregate income shocks. We re-estimated the relationship and dummied all US military conflicts with similar results concerning military spending's effect on output. Interestingly, we find trade-offs between defense and non-defense government spending during war time.
* The views expressed in this paper are those of the authors and do not necessarily reflect the official policy or position of the US Air Force, the Department of Defense, or the US Government. The authors would like to express their thanks for the comments from Craig Stone and the other participants at the 2006 Canadian Economics Association conference, as well the comments received from three anonymous referees and the editor.
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