Growth, investment and military expenditure in the European Union‐15

The purpose of this paper is to investigate the relationship between growth, investment and military expenditure in the case of the European Union‐15.

The paper uses fixed panel models, random coefficient models and a trivariate VAR model to examine empirically the relationship between these three macroeconomic variables.

The results obtained and reported herein show a significant positive effect of the growth rate on the share of military expenditure and on the share of investment. However, on the whole, the findings do not seem to point to any consistent quantitative relation between defence spending and either growth or investment. Thus, they appear to be in line with the findings of other studies.

The economic effects of military spending have drawn considerable attention. Demand side effects on capacity utilisation are one possible channel through which the economy can be positively affected by such expenditure. On the other hand however, reduced investment and capital stock have been reported as a possible negative economic impact of defence outlays that can more than offset any growth inducing effective demand stimulation. The paper attempts a simultaneous assessment of the impact of defence expenditure on both growth and investment for the EU‐15, something that has not been tried before.