Abstract
The causal relationship between defense spending and economic performance is reinvestigated using structural vector autoregressive model (SVAR). A specified structural VAR model is not affected by the ordering of variables. Two possible macro structural models are proposed. The price level and unemployment innovations in the structural models explain more of the fluctuations of the defense variable than in the unstructured recursive models (URVAR). The effect of output on defense spending is exaggerated in the recursive model when compared to the structural model for one ordering of variables. An interesting finding is that the impact on defense spending by shocks in the price level is increased significantly with postwar data in SVAR as well as URVAR.
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