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Military spending and growth: a small open economy stochastic growth model

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  • Shin-Chyang Lee
  • Cheng-Te Lee
  • Shang-Fen Wu

Abstract

The paper analyzes the effects of military spending on economic growth in a small open stochastic endogenous growth model involving the supply-side and demand-side effects produced by military spending. We show that a rise in the military spending affects economic growth through four channels, including the crowding-out effect, the spin-off effect, the resource mobilization effect, and the portfolio effect. The net effect which depends on these four channels is ambiguous. Hence, we demonstrate that there exists an optimal defense burden that maximizes the economic growth rate.

Suggested Citation

  • Shin-Chyang Lee & Cheng-Te Lee & Shang-Fen Wu, 2016. "Military spending and growth: a small open economy stochastic growth model," Defence and Peace Economics, Taylor & Francis Journals, vol. 27(1), pages 105-116, February.
    • Handle: RePEc:taf:defpea:v:27:y:2016:i:1:p:105-116
    DOI: 10.1080/10242694.2015.1094881
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    1. Deger, Saadet & Sen, Somnath, 1995. "Military expenditure and developing countries," Handbook of Defense Economics, in: Keith Hartley & Todd Sandler (ed.), Handbook of Defense Economics, edition 1, volume 1, chapter 11, pages 275-307, Elsevier.
    2. van der Ploeg, F & de Zeeuw, A J, 1990. "Perfect Equilibrium in a Model of Competitive Arms Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 131-146, February.
    3. Gong, Liutang & Zou, Heng-fu, 2003. "Military spending and stochastic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 28(1), pages 153-170, October.
    4. W. Robert J. Alexander, 2015. "The Keynesian IS-MR Model and Military Spending," Defence and Peace Economics, Taylor & Francis Journals, vol. 26(2), pages 213-221, April.
    5. Sandler,Todd & Hartley,Keith, 1995. "The Economics of Defense," Cambridge Books, Cambridge University Press, number 9780521447287, January.
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    Cited by:

    1. Jun Ando, 2018. "Externality of Defense Expenditure in the United States: A New Analytical Technique to Overcome Multicollinearity," Defence and Peace Economics, Taylor & Francis Journals, vol. 29(7), pages 794-808, November.
    2. Ricardo Ferraz, 2022. "The Portuguese Military Expenditure from a Historical Perspective," Defence and Peace Economics, Taylor & Francis Journals, vol. 33(3), pages 347-365, April.
    3. Dada James Temitope & Awoleye Emmanuel Olayemi & Arnaut Marina & Al-Faryan Mamdouh Abdulaziz Saleh, 2023. "Revisiting the Military Expenditure-Growth Nexus: Does Institutional Quality Moderate the Effect?," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 29(1), pages 19-42, February.

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