A Nonlinear Model of Military Expenditure Convergence: Evidence From Estar Nonlinear Unit Root Test

Lau, Chi Keung, Demir, Ender and Bilgin, Mehmet Huseyin (2016) A Nonlinear Model of Military Expenditure Convergence: Evidence From Estar Nonlinear Unit Root Test. Defence and Peace Economics, 27 (3). pp. 392-403. ISSN 1024-2694

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Official URL: http://dx.doi.org/10.1080/10242694.2015.1016296

Abstract

The paper builds a model to empirically test military expenditure convergence in a nonlinear set up. We assert that country A chooses a military strategy of catching up with the military expenditure of its rivals, subject to public spending constraints on public investments, including health and education, leading to decrease in long-term economic welfare. This implies nonlinear convergence path: only when the military expenditure gap between countries reaches the threshold level, will it provide incentives to catch up with rival’s military expenditures. We test this nonlinear catching up hypothesis for 37 countries spanning from 1988 to 2012. Results from individual nonlinear cross-sectionally augmented Dickey–Fuller (NCADF) regression indicate that 53% of countries converge to world’s average military expenditure: where 39% of countries converge to Germany; 33% of countries converge to China; 22% of countries converge to the USA, and 11% of countries converge to Russia. Interestingly, USA does not exhibit nonlinear military expenditure convergence toward world’s average level. For panel NCADF regression, the result suggests that on average, there is evidence for countries converging to USA’s military expenditure at 10% significance level. For the convergence to the world’s average, the statistical significance is at the 1% significance level.

Item Type: Article
Uncontrolled Keywords: Military expenditure, convergence, nonlinear panel unit root test, C22, C23, O18
Subjects: N300 Finance
Department: Faculties > Business and Law > Newcastle Business School > Business and Management
Depositing User: Becky Skoyles
Date Deposited: 13 Mar 2015 15:39
Last Modified: 03 May 2016 08:41
URI: http://nrl.northumbria.ac.uk/id/eprint/21616

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