A Panel Data Investigation of the Military Spending – Economic Growth Nexus in the EU

• Název práce v češtině: Vztah mezi armádními výdaji a ekonomickým růstem v EU: Analýza panelových dat
• Název v anglickém jazyce: A Panel Data Investigation of the Military Spending – Economic Growth Nexus in the EU
• Klíčová slova anglicky: Economic growth, military spending, panel data analysis, panel vector autoregression model
• Akademický rok vypsání: 2019/2020
• Typ práce: bakalářská práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: Shahriyar Aliyev
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 31.07.2020
• Datum zadání: 31.07.2020
• Datum a čas obhajoby: 24.01.2022 09:00
• Datum odevzdání elektronické podoby: 03.01.2022
• Datum proběhlé obhajoby: 24.01.2022
• Oponenti: PhDr. Jiří Schwarz, Ph.D.

Seznam odborné literatury

1) Ahmed, S., Ismail, S. (2015). Economic Growth and Military Expenditure Linkages: A Panel Data Analysis. International Economic Policy, 2(23), pp. 48-72.
2) Aizenman, J., Glick, R. (2006). Military expenditure, threats, and growth. Journal of International Trade & Economic Development, 15(2), pp. 129-155.
3) Bergh, A., Henrekson, M. (2011). Government Size and Growth: A Survey and Interpretation of the Evidence. Journal of Economic Surveys, 25(2), pp. 872-897.
4) Biyase, M., Zwane, T. (2016). Military Spending and Economic Growth: Evidence from the Southern African Development Community. Frontiers in Finance and Economics, 13(2), pp. 106-122.
5) Canova, F., Ciccarelli, M. (2004). Forecasting and turning point predictions in a Bayesian panel VAR model. Journal of Econometrics, 120(2), pp. 327-359.
6) D’Agostino, G., Dunne, J.P., Pieroni, L. (2019). Military Expenditure, Endogeneity and Economic Growth. Defence and Peace Economics, 30(5), pp. 509-524.
7) Desli, E., Gkoulgkoutsika, A. (2020). Military spending and economic growth: a panel data investigation. Economic Change and Restructuring.
8) Dudzeviciute, G., Peleckis, K., Peleckiene, V. (2016). Tendencies and Relations of Defense Spending and Economic Growth in the EU Countries. Inzinerine Ekonomika-Engineering Economics, 27(3), pp. 246-252.
9) Dunne, J.P., Tian, N. (2016). Military expenditure and economic growth, 1960-2014. The Economics of Peace and Security Journal, 11(2), pp. 50-56.
10) Kollias, C., Paleologou, S. M. (2019). Military spending, economic growth and investment: a disaggregated analysis by income group. Empirical Economics, 56, pp. 935-958.

Předběžná náplň práce v anglickém jazyce

Research question and motivation
The EU has been experiencing a steady decline in defense spending throughout the last two decades. Overall, the world is seeing less armed conflict nowadays, thus the perceived need to allocate taxpayers’ money into preventative measures appears more superfluous – especially, when generally unsupported by the public (Dudzeviciute et al., 2016). The possible effects of increased defense spending on economic growth are varied and circumstances where such an increase would lead to positive effects can be proposed. For example, in the Keynesian view an increase in defense spending can expand the aggregate demand which can boost the economy (Ahmed and Ismail, 2015). Conversely, military expenditure could potentially be economically wasteful as a misallocation of resources or potential crowding out of other forms of investment (Dudzeviciute et al., 2016; Kollias and Paleologou, 2019).

The purpose of this work is, therefore, to investigate empirically the relationship between defense spending and economic growth in the EU. Results of the thesis can inform policy action as well as indicate whether the trend of diminishing military spending in the EU is justified in the context of economic growth.

Contribution
The literature regarding the relationship between defense spending and economic growth has yielded inconclusive results both in terms of the direction of the relationship and in terms of the nature of the impact of defense spending on economic growth. Depedning on the method, data used to measure defense spending, countries chosen and whether the studied data included the cold war the results change. Therefore no consensus has been reached as of the time of writing this proposal (Ahmed and Ismail, 2015; Aizenman and Glick, 2006; D’Agostino et al., 2019; Desli and Gkoulgkoutsika, 2020; Dunne and Tian, 2016). Moreover, much of the literature uses widely varying time periods and groups of countries. Additionally, most dwells beyond the EU, whilst this thesis intends to focus solely on the EU member states from 2004 to 2019. The selected group of countries and the strictly post cold war time period are chosen to generate results indicating the bahavior of the economic growth – military expenditure nexus within the EU.

Methodology
An underlying issue with carrying out an investigation into the nature of the defesne spending and economic growth relationship lies in the endogeneity of the aforementioned variables. One cannot be sure whether defense spending has an effect on economic growth, e.g. by crowding out investment, or if it is economic growth that allows for more military expenditure. Various researchers have approached the issue. To name a few: Dudzeviciute et al. (2016) have used Granger testing to assess the causality and diretction of the relationship, Biyase and Zwane (2016) have used a Fixed Effects model with a FE-IV Two Stage Least Squares estimator as their approach to the endogeneity, while Desli and Gkoulgkoutsika (2020) applied a dynamic common correlated effects estimator.

The thesis utilizes a panel VAR model, a general form of which can be found in Canova and Ciccarelli (2004) and which was expanded upon in a study on the topic by Kollias and Paleologou (2019). PVAR has the advantage of being flexible and more specifically for the chosen topic, treats all the variables in the system as endogenous. Similarily to a Fixed Effects model it allows for unobserved individual heterogeneity, but also improves asymptotic results (Kollias and Paleologou, 2019).

Outline
1. Introduction
2. Literature Review
3. The Econometric Method of Panel Data Analysis
4. Data and Variable Description
5. Regression Model
6. Results and Interpretation
7. Conclusion