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MILITARY EXPENDITURE AND ECONOMIC ACTIVITY:The Colombian Case

Author

Listed:
  • Andrés Arias
  • Laura Ardila

Abstract

We enhance a standard RBC model to account for military expenditure and the costs of an internal conflict or war. The model captures the natural trade-off in military expenditure: crowding out of private consumption and investment but less destruction (and, therefore, higher marginal productivity) of private capital (and labor). Hence, military expenditure below (above) a certain threshold generates a positive (negative) net benefit in terms of output. The model is calibrated to an annual frequency using Colombian data. We find that an increase in military expenditure of 1 % GDP (the current policy of Colombian authorities) increases investment and output above the steady state during several periods, before the shock fades away. Even though consumption falls on impact (to open up space for the additional military expenditure and private investment), it increases above its stationary trend after three periods, remains on positive grounds thereafter, and the cumulated net gain is positive.

Suggested Citation

  • Andrés Arias & Laura Ardila, 2003. "MILITARY EXPENDITURE AND ECONOMIC ACTIVITY:The Colombian Case," Documentos CEDE 3221, Universidad de los Andes, Facultad de Economía, CEDE.
    • Handle: RePEc:col:000089:003221
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    File URL: https://repositorio.uniandes.edu.co/bitstream/handle/1992/8425/dcede2003-20.pdf
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    Citations

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    Cited by:

    1. Andres F. Arias & Hernan Maldonado, 2004. "FARC Terrorism in Colombia: A Clustering Analysis," Investigación Económica en Colombia 2715, Fundación Pondo.
    2. Andrés Arias & Hernán Maldonado, 2004. "FARC TERRORISM IN COLOMBIA A Clustering Analysis," Documentos CEDE 2716, Universidad de los Andes, Facultad de Economía, CEDE.
    3. World Bank, 2005. "Colombia : Public Expenditure Review," World Bank Publications - Reports 8559, The World Bank Group.
    4. Andrés Felipe Mora Cortés, 2013. "Conflicto, violencia socioeconómica y desplazamiento forzado en Colombia," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, December.

    More about this item

    Keywords

    Real business cycle;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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