The Relationship between Military Expenditure and Economic Growth: A Panel Cointegration and Causality Analysis

Abstract

This study investigates the correlation between military expenditure and economic growth for low and high income countries. Thus, different from similar studies, our empirical approach explicitly considers cross-sectional dependency to attain more reliable econometric results. In addition, new panel cointegration and causality tests are performed in the study. Our empirical findings indicate that military expenditure and economic growth are co-integrated both in low and high income countries. Furthermore, our findings lend evidence to the bi-directional causality between military spending and economic growth for low income countries. On the other hand, we have determined that there is unidirectional causality running from military expenditure to GDP per capita for high income countries.