A causality analysis. Military expenditures and economic growth in USA and China

Recent literature on military expenditures in the economic system has pointed out in recent years that China's role as not only economic but also military power, is becoming increasingly important, leading to China's emergence as a world military power capable of undermining the United States supremacy. The analysis undertaken tests the hypothesis that, in China, unlike the US, the increase in military spending is essentially due to the increase in GDP made available by Chinese economic boom. On the other hand, in US, the high military expenditures and its trend is the result of a strategic decision determined only partially and to a limited extent by GDP trends. Hypotheses validation implies that increase in Chinese military expenditure is fully explained by increase in GDP. On the other hand, in the United States, the variation in GDP explains only a part of variation in military spending, suggesting the possibility of investigating other factors determining their variation. The empirical analysis is performed through an econometric analysis accomplished using Toda-Yamamoto approach to Granger causality, impulse response function and variance decomposition analysis.