Dynamic Causalities between Defense Expenditure and Economic Growth in China: Evidence from Rolling Granger Causality Test

Abstract

ABSTRACT This study examines the causal nexus between defense expenditure and economic growth in China using the bootstrap Granger full-sample causality test and rolling-window estimation. The full-sample result indicates a positive bidirectional causality between economic growth and defense expenditure, suggesting that more defense spending increases economic growth, and vice versa. By adopting a time-varying rolling-window approach to revisit the dynamic causal relationships, this article identifies that the causality changes over time. We find significant positive short-run causality running from economic growth to defense expenditure in most of the time investigated, thus implying that economic growth stimulates defense expenditure. However, large-scale disarmaments break such positive linkage. Conversely, both positive and negative effects of defense expenditure on economic growth are demonstrated, showing that more defense spending has ambiguous effect on economy. Consequently, economic growth mainly drives defense expenditure rather than the other way around. The impact of defense expenditure in China on national economy is affected by multiplier effect and crowding-out effect as well as institutional factors.