Defence Expenditure and Macroeconomic Stabilization: Causality Evidence from Pakistan

Abstract

The objective of this study is to investigate the plausibility of using defence expenditure as a macroeconomic stabilization tool (referred as Military Keynesianism Hypothesis) in case of Pakistan. Johansen’s co-integration techniques are used followed by the vector error correction modeling (VECM). Various parametric restrictions on VECM were tested to discern the Granger causal chains among defence spending, development expenditure, CPI and income. Using annual time series data from FY51 to FY03, we found a long-run relationship among the variables. The results tend to favor a long-run bi-directional causality among the variables. However, this temporal dependence does not hold in the short-run, as the lagged differences of defence expenditures do not significantly explain GDP and inflationary dynamics. These seemingly contrasting results for the short-run and long-run causality suggest that although MKH does not hold over the estimation period, long-run economic growth is not hurt by defence expenditure.