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

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ABSTRACT

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.

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