Further Causality Evidence on Arms Race, Inflation and Economic Growth

This paper examines the effects of expanding the ratio of defense spending on long-run inflation and economic growth by constructing an endogenous growth model and employing empirical approaches for China, Japan, South Korea, and Taiwan over the period between 1955 and 2010. By analyzing cointegration test results, it is found that: (1) the increase of the ratio of defense spending leads to a lower long-run inflation rate in China and Japan, but higher inflation rate in Taiwan; (2) the increase of the ratio of defense spending leads to a higher long-run economic growth, supporting the famously Benoit Hypothesis for China, Japan and Taiwan; (3) The results of bidirectional Granger causality test suggests that an arms race exists among the cross-country pairs of China and Japan, China and Taiwan, and the last pair, Japan and South Korea. Based on (1) to (3), as the ratio of defense spending increases, an arms race, higher economic growth and lower inflation coexist in China and Japan. These findings may also be an explanation of why, in view of economic performance, those arms race and disarmament issues have been advocated in recent years.