An Econometric Contribution to the U.S. Defense—Growth Nexus: Evidence from Error Correction Model

Past and contemporary research has examined the relationship between military spending and economic growth and has reported mixed results. These conflicting findings are perhaps due to the methodologies employed. Consequently, this study employs a simple, parsimonious New Growth model to investigate the link between military spending and economic growth in the United States over the period 1/1959—1/2001 by adopting a more robust estimation technique. It follows the Johansen co-integration and error correction methodology coupled with vector autoregression (VAR) and innovation accounting techniques. Findings are robustly substantiated and reveal that military spending and growth have neither a statistical nor an economic impact on each other. This suggests that current U.S. political debates opposing or favoring military spending on the grounds of its economic merit are irrelevant.