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Non-Linearity In The Defence Expenditure - Economic Growth Relationship In Taiwan

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  • Chien-Chiang Lee
  • Sheng-Tung Chen

Abstract

To gain better insight into the debate concerning the relationship between defence expenditure and economic growth, this paper empirically applies Hansen's (1996) threshold regression model to examine the threshold effect between the two variables. Allowing defence expenditure to have a non-linear effect sheds considerable new light on the characteristics of the defence-growth link. The single subject, Taiwan, is tested using both a neoclassical one-sector aggregate production function model and Feder's (1982) two-sector production function model over the 1960 to 2002 period. The empirical analysis indicates that the threshold effect strongly exists in 1973 and 1982 coinciding with the occurrence of two energy crises, and the non-linear relationship is solidly supported with both models. While positive externalities seem to prevail for moderate levels of defence spending, the positive effect of defence expenditure on economic growth disappears when the level is relatively large. Thus, only when defence expenditure is small, does the Benoit hypothesis hold. It is demonstrated that a threshold regression provides a far superior empirical model than the standard linear model.

Suggested Citation

  • Chien-Chiang Lee & Sheng-Tung Chen, 2007. "Non-Linearity In The Defence Expenditure - Economic Growth Relationship In Taiwan," Defence and Peace Economics, Taylor & Francis Journals, vol. 18(6), pages 537-555.
  • Handle: RePEc:taf:defpea:v:18:y:2007:i:6:p:537-555
    DOI: 10.1080/10242690601055762
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    References listed on IDEAS

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    Cited by:

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    2. Julien Malizard, 2014. "Dépenses militaires et croissance économique dans un contexte non linéaire. Le cas français," Revue économique, Presses de Sciences-Po, vol. 65(3), pages 601-618.
    3. Charles Shaaba Saba & Nicholas Ngepah, 2022. "Nexus between defence spending, economic growth and development: evidence from a disaggregated panel data analysis," Economic Change and Restructuring, Springer, vol. 55(1), pages 109-151, February.
    4. Sheng-Tung Chen, 2016. "A Fiscal View on Analyzing the Impact of Organizing Mega Sporting Events," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 12(2), pages 205-226, August.
    5. Aurelien, Njamen Kengdo Arsene & Nchofoung, Tii Njivukuh & Marcel, Takoulac Kamta & Jean-Claude, Kouladoum, 2019. "Non-linear effect of military spending on economic growth in Africa: A comparative study between stable and unstable countries," International Journal of Development and Conflict, Gokhale Institute of Politics and Economics, vol. 9(2), pages 195-215.
    6. Chen, Pei-Fen & Lee, Chien-Chiang & Chiu, Yi-Bin, 2014. "The nexus between defense expenditure and economic growth: New global evidence," Economic Modelling, Elsevier, vol. 36(C), pages 474-483.
    7. Duygu Yolcu Karadam & Jülide Yildirim & Nadir Öcal, 2017. "Military expenditure and economic growth in Middle Eastern countries and Turkey: a non-linear panel data approach," Defence and Peace Economics, Taylor & Francis Journals, vol. 28(6), pages 719-730, November.

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