THE EFFECTS OF DEFENSE EXPENDITURES ON ECONOMIC GROWTH: COINTEGRATION AND CAUSALITY ANALYSIS IN SELECTED EUROPEAN UNION COUNTRIES

Abstract

There are two main approaches to explaining the effect of the defense expenditures in the literature. One, “the Military Keynesianism and Benoit Hypothesis” approach, explains the existence of positive effects of military spending on economic development. The Second, “The Neoclassic Approach”, explains the crowding out effect on private investment. This study investigates the effect of defense expenditures on economic growth by using panel data method for selected 21 European Union countries over the period of 2005-2017. The long term relationship among the variables was determined by second generation panel unit root tests and panel cointegration tests. The long term cointegration coefficients were estimated with Eberhardt- Bond (2009) Panel AMG method. AMG results show that defense expenditures have positive and statistically significant effect on economic growth in the long term. Moreover, the Emirmahmutoğlu and Köse Panel Causality Test (2011) results show that there is a two-way causality relationship between defense expenditures and economic growth. Empirical findings of this study provide the positive effect of defense expenditures on economic growth for selected 21 European Union.