Trade openness, political institutions, and military spending (evidence from lifting Iran’s sanctions)

Under the recent nuclear deal on Iran’s nuclear program, many of the most punishing sanctions are poised to be lifted. This study examines how trade openness (due to lifting the sanctions against trade) could affect the political institutions and military expenditure in Iran based on the available dataset for the period of 1960–2011. Using impulse response functions (IRF) and a variance decomposition analysis (VDC) on the basis of a vector autoregressive (VAR) model, the results imply that the response of political institutions to an improvement in international trade is negative and statistically significant, whereas that of military spending is positive and significant. Moreover, the shocks to trade openness influences military spending more than non-military spending over the all years after the initial shocks. These results are robust to other indicators of political institutions, different orderings of variables in the VAR and alternative specifications of trade, and government revenues and expenditures.