Military spending and economic growth in China: a regime-switching analysis

This article investigates the impact of military spending changes on economic growth in China over the period 1953 to 2010. Using two-state Markov-switching specifications, the results suggest that the relationship between military spending changes and economic growth is state dependent. Specifically, the results show that military spending changes affect the economic growth negatively during a slower growth–higher variance state, while positively within a faster growth–lower variance one. It is also demonstrated that military spending changes contain information about the growth transition probabilities. As a policy tool, the results indicate that increases in military spending can be detrimental to growth during slower growth–higher growth volatility periods.     

Government Size and Stochastic Growth

This paper analyses the effects of the size of government on economic growth in a stochastic endogenous growth model involving the supply‐side effect and demand‐side effect produced by government spending. We show that a rise in the government spending affects economic growth through three channels, including the crowding‐out effect, the spin‐off effect and the resource mobilisation effect. We demonstrate that there exists an optimal size of government that maximises the economic growth rate.     

Terms of trade volatility,government spending cyclicality,and economic growth

This paper presents estimates of the effects that terms of trade volatility has on real gross domestic product (GDP) per capita growth. Based on 5‐year nonoverlapping panel data comprising 175 countries during 1980 to 2010, the paper finds that terms of trade volatility has significant negative effects on economic growth in countries with procyclical government spending. In countries where government spending is countercyclical, terms of trade volatility has no significant effect on growth. Conditional on the mediating role of government spending cyclicality, the GDP share of domestic credit to the private sector has no significant effect on the relationship between growth and terms of trade volatility.     

Military spending and the black market premium in developing countries

Researchers who have been concerned with the economic implications of military spending have mostly concentrated on its impact on economic growth, corruption, real exchange rate and inflation. In this paper we investigate the impact of military spending on black market premium, an area that has not been tackled so far. After adding a measure of military spending to a well established model of black market premium form the literature, we estimate the model by pooling annual data over the 1985 – 1998 period across 61 developing countries. Results from five panel specifications provide considerable evidence that higher military spending leads to higher black market premium.     

Investigating the Dynamic Interaction between Military Spending and Economic Growth

The relationship and interaction of military spending and economic growth have been theoretically and empirically investigated since the 1970s but it still cannot provide conclusive evidence towards the direction and the quantification of the impact between the two magnitudes. The use of different data sets in terms of time periods, and number and geographic location of countries, different theoretical background leading to different econometric specifications, and single type of econometric methodology, make any comparison impossible. This paper looks into the dynamic interaction between military spending and economic growth during the period 1988–2013 that includes the recent years of economic crisis covering 138 countries without making any prior assumptions about the theoretical channels of influence, while not limited to a single estimation method but employing a wide range of methodologies in order to form a complete picture of the long‐ and short‐run interaction. Furthermore, as such interaction might not be linear, we create three groups of countries based on the countries' income developmental stage. Overall we find no evidence of long‐ and short‐run causality from the military spending to economic growth except for the developing countries (positive in the long run). However, from economic growth to military spending we find a positive impact for all groups except the least developed countries. We also notice the interaction was more prominent prior to the start of the economic crisis.     

Corruption and growth in Africa

A major concern in the development of African economies is the impact of corruption on economic growth and while there is general agreement on its detrimental effects, there is considerable debate over its nature and importance. In particular there is little work on the interaction between corruption, government expenditures and how this influences economic growth in countries in the region. This paper takes an endogenous growth model, extends it to include different categories of government spending and then introduces the possibility of corruption, which is allowed to have different effects on each of the categories. The results confirm the negative effect of corruption and military spending, but also show that corruption interacts with military burden, through indirect and complementary effects, to further increase its negative effect. The policy implications are that the effects of corruption on economic growth are worse than was thought in countries which have high military burdens.     

SOCIAL STATUS,EDUCATION AND GOVERNMENT SPENDING IN A TWO‐SECTOR MODEL OF ENDOGENOUS GROWTH*

This paper extends the relative wealth specification of status preference to the two‐sector Uzawa (1965 )– Lucas (1988 ) model and examines the effectiveness of government spending on economic growth. It is found that the desire for relative wealth‐induced social status and/or the education component of relative wealth‐induced social status are important ingredients in determining the growth rate effects of government spending. Provided that the agent is concerned with his or her relative social position, the education‐induced social status plays a more important role than the physical‐asset‐induced social status in determining the validity of public spending on growth. If individuals do not care about their education‐driven social rewards, then an increase in government spending has no effect on the balanced growth rate regardless of the presence of the physical‐asset‐induced social status. A rise in government spending reduces the long‐run growth rate if the education‐induced social status is present.     

Economic growth,repression, and state expenditure in non-democratic regimes

This paper examines how economic growth affects government spending in non-democracies. A robust finding is that positive growth induces a significant increase in defence spending but a decrease in non-defence spending in dictatorships, with little effect in democracies. Government spending is slightly sensitive to negative growth across regimes. Higher growth rate in a country than its neighbours induces more spending than their average. Corruption causes a reduction in defence spending but an increase in non-defence spending. Primary education stimulates non-defence spending but reduces defence expenditure, secondary education causing the opposite effect. An under-developed country spends less than a developed country.     

Optimal military spending in the US: A time series analysis

This paper extends previous work on the optimal size of government spending by including nested functional decompositions of military spending into consumption and investment. Post World War II US data are then used to estimate nested non-linear growth models using semi-parametric methods. As expected, investments in military and non-military expenditure are both found to be productive expenditures with respect to the private production. Moreover there is little evidence to suggest that current military spending is having a negative impact on economic growth in the US, while civilian consumption only tends to have only a weak impact. This does not imply that society will necessarily benefit from a reallocation of more spending to the military sector, nor that it is the best way to achieve economic growth.     

Human capital accumulation and output growth in a stochastic environment

We study the relationship between growth and volatility in a simple analytical model, where human capital accumulation depends on both deliberate and non-deliberate learning, and where stochastic fluctuations arise from both preference and technology shocks. We derive a number of new results which challenge some of the results in the existing literature. First, we show that the optimal allocations of time to working and learning are both pro-cyclical. Second, we identify a preference parameter (other than the coefficient of relative risk aversion) that is potentially crucial for governing the effect of volatility on growth. Third, we demonstrate how this effect can be either positive or negative under each type of learning, the relative importance of which is irrelevant to the outcome. Fourth, we reveal how the effect may also be different for the two types of shock. Our results may be seen as providing further explanation for the lack of robust evidence on the issue.      

‘GUNS OR BUTTER?’ REVISITED: ROBUSTNESS AND NONLINEARITY ISSUES IN THE DEFENSE–GROWTH NEXUS

The relationship between military expenditure and growth is studied taking into account potential nonlinearities and robustness issues in the specification of the econometric models used. Using cross‐country growth regressions and the widely used Feder–Ram model, the partial correlation between defense spending and economic growth appears robust and significantly negative only for countries with a relatively low military expenditure ratio. While the externality effect appears positive in this subgroup of countries, the overall effect turns negative due to the size effect of the military sector.     

On indeterminacy and growth under progressive taxation and productive government spending

We examine the theoretical interrelations between equilibrium (in)determinacy and economic growth in a one‐sector representative‐agent model of endogenous growth with progressive taxation of income and productive flow of public spending. We analytically show that, if the demand‐side effect of government purchases is weaker, the economy exhibits an indeterminate balanced‐growth equilibrium and belief‐driven growth fluctuations when the tax schedule is sufficiently progressive or regressive. If the supply‐side effect of public expenditures is weaker, indeterminacy and sunspots arise under progressive income taxation. In sharp contrast to traditional Keynesian‐type stabilization policies, our analysis finds that raising the tax progressivity may destabilize an endogenously growing economy with fluctuations driven by agents’ self‐fulfilling expectations.     

Guns,highways and economic growth in the United States

Given its significant policy implications, the nexus between public expenditures and economic growth has been the subject of an extensive and often emotive theoretical and empirical debate. The nexus between two types of public expenditures and economic growth is examined in this paper using both linear and nonlinear causality tests. Both spending on highways and on defence are regarded, albeit with not the same intensity of conviction, as useful counter-cyclical policy instruments and as stimuli to economic growth. Findings reported herein from both linear and non-linear causality tests offer evidence in support for the growth enhancing properties of the former type of public spending but not so in the case of military expenditure.     

Home Bias and High Turnover in an Overlapping-generations Model with Learning

This paper develops a two‐country overlapping‐generations (OLG) model under the assumption that investors are on a learning path. While investors from both countries receive identical information flows, domestic investors start off with less precise prior beliefs concerning foreign fundamentals. On a learning path, differences in beliefs and estimation risk generate portfolio biases that match the empirical evidence: home bias in equity portfolios and trend‐chasing in international flows. In addition, due to the higher volatility of the estimates of foreign state variables, our model produces excessive turnover in foreign securities. We calibrate the model on the historical path of quarterly real GDP data for the US and Europe. Under the assumption of a financial liberalization in the 1970s, the model produces preference for domestic securities and turnover.     

Industrial structure and economic performance: The role of productive public expenditure

I consider productive government spending and preference for diversity in an imperfectly competitive macroeconomic framework, and analyze how differences in industrial structure affect economic growth and the welfare level. Two main findings emerge from the analysis. First, the optimal ratio of government spending is related to the extent of public expenditure externalities and preference for diversity. Second, the vertical separation regime leads to a higher economic growth rate and welfare level than the vertical integration regime, provided that the degree of monopoly power is relatively small.     

Effects of government spending on private investment

This paper investigates the effects of military and non-military public expenditures on gross private investment using cointegration and error-correction analysis. The latter type of public spending is disagreggated into expenditures of infrastructure, consumption and other general government expenditures. The empirical evidence from four emerging European countries namely, Greece, Ireland, Portugal and Spain suggests that in some cases public capital spending stimulates investment, while in others it depresses it. Also, the results tentatively indicate that defence spending exerts no influence on private investment, thus adding to the ongoing controversy of the economic effects of military spending.     

Defence spending,economic growth and temporal causality: evidence from Taiwan and mainland China, 1952-1995

This paper uses a cointegration analysis and a vector autoregressive model (VAR) to examine the causal relationship between defence spending and economic growth for Taiwan and Mainland China over the period 1952–1995. It is found that these two variables are not cointegrated for both countries studied. The results of the Granger causality tests suggest bidirectional Granger causality (feedback) between defence spending and economic growth for Taiwan, unidirectional Granger causality running from economic growth to defence spending for Mainland China, and unidirectional Granger causality running from Taiwan's defence spending to Mainland China's defence spending for cross-country studied. These results further indicate that there exists no arms race between two countries from both sides of Taiwan strait. Furthermore, impulse responses and variance decompositions are incorporated into the analysis. The results from the impulse responses and variance decompositions tell a similar story.     

基于RIMS Ⅱ的国防支出区域经济效应分析——以美国圣迭戈县为例

国防支出对区域经济影响的主要分析工具之一是投入产出分析技术。本文在RIMS Ⅱ(Regional Input-Output Mod-eling System,区域投入产出模型化系统)基础上,讨论了区域投入产出分析的主要乘数模型:产出乘数、就业乘数和收入乘数。将乘数模型应用于国防支出的区域经济效应研究,我们发现,国防支出通过驻地军事基地和装备采购支出对区域经济发展的影响是显著的。由于国防支出由中央政府支付,经济区域内国防支出的流入意味着为区域经济注入了必要的生产发展资金,推动经济区域内循环往复的生产、消费、税收和就业。同时,不同类型的国防支出流入在区域经济内发挥的经济效应是不同的。以生产武器装备,承接国防合同为主而流入大量国防采购资金、国防R&D资金的地区,显然要比经济区内单纯驻有军事基地的地区有更高的乘数效应,国防支出对区域经济的产出、收入和就业的经济效应更为明显。     

The impact of the Interaction between institutional quality and aid volatility on growth: theory and evidence

We analyze both theoretically and empirically, the effect of aid volatility and its interaction effect with institutional quality on per capita economic growth. Our theoretical model, in which an aid-recipient government, operating in an institutional environment of some given quality (making choices over the distribution of aid), predicts that a negative effect of aid volatility on growth is mitigated by stronger institutional quality. We use panel data covering the period 1984–2004 for 78 countries to test this theoretical prediction. Using Generalised Methods of Moments (GMM) we find the relationship between growth and aid volatility is significantly negative and depends on institutional quality. Our baseline results are robust to various computations of aid volatility and foreign aid, time periods, sub-samples and additional covariates.     

DEFENCE AND NON‐DEFENCE SPENDING IN THE USA: STIMULI TO ECONOMIC GROWTH? COMPARATIVE FINDINGS FROM A SEMIPARAMETRIC APPROACH

Given its significant policy implications, the nexus between public expenditures and economic growth has been the subject of an extensive and often emotive theoretical and empirical debate. In this paper, a semiparametric model is used to explore the link between GDP and defence and non‐defence government spending in the USA over the period 1929–2009. Evidence reported herein indicates that the latter represents a greater stimulus vis‐à‐vis the former.