Are Fluctuations in Military Spending Transitory or Permanent? International Evidence

All preceding studies that investigates the consequences of "defense news" shocks (like war on terrorism) on military spending assumed a permanent deviation from its growth path. This paper reverses this finding by employing more powerful panel unit root tests that accounts for both cross-sectional dependence across countries and structural breaks on military spending series of more than 100 countries over 1988 - 2012; based on the definitions of income levels suggested by the World Bank – high, middle and low. We find robust evidence supporting the stationarity of military spending for all the panels (full, high, middle and low income countries) which reverses the results of past works that failed to reject non-stationarity in the data. These findings reveal that any exogenous shock to military spending has a temporary effect for high, middle and low income countries, meaning that military spending will return to its time trend. The stationary characteristic of military spending is fundamental for forecasting defence budget in response to exogenous shocks (terrorism and military conflicts).