MILITARY SPENDING, THREATS AND STOCHASTIC GROWTH
Version of Record online: 24 JAN 2011
© 2011 The Authors. Bulletin of Economic Research © 2011 Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research.
Bulletin of Economic Research
Volume 64, Issue 1, pages 8–19, January 2012
How to Cite
Lin, P.-S. and Lee, C.-T. (2012), MILITARY SPENDING, THREATS AND STOCHASTIC GROWTH. Bulletin of Economic Research, 64: 8–19. doi: 10.1111/j.1467-8586.2010.00368.x
- Issue online: 12 DEC 2011
- Version of Record online: 24 JAN 2011
- military spending;
- military threat;
- stochastic growth
This paper analyses the impact of home military spending and foreign military threat on economic growth in a stochastic endogenous growth model involving the supply-side and demand-side effects produced by military spending. The paper states that an increase in home military spending affects economic growth through three channels, including the crowding-out effect, the spin-off effect, and the resource mobilization effect. The net effect which depends on these three channels is ambiguous. Hence, we demonstrate that there exists an optimal defence burden that maximizes the economic growth rate. Furthermore, the optimal defence burden depends on the degree of risk preference. Namely, the optimal defence burden of the risk-loving agent is more than that of the risk-neutral agent, and in turn is more than that of the risk-averse agent. At the same time, we prove that the relationship between the volatility in military spending and economic growth also depends on the degree of risk preference. In addition, we show that greater volatility in foreign military spending leads to a decrease in home aggregate consumption, and hence speeds up economic growth in the home country.