The impact of defence expenditure on the Australian macroeconomy : a VAR analysis

Wilkins, Nigel Phillip. (1993). The impact of defence expenditure on the Australian macroeconomy : a VAR analysis Honours Thesis, School of Economics, The University of Queensland.

       
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Author Wilkins, Nigel Phillip.
Thesis Title The impact of defence expenditure on the Australian macroeconomy : a VAR analysis
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 1993
Thesis type Honours Thesis
Total pages 117
Language eng
Subjects 14 Economics
Formatted abstract The impact defence spending has on the Australian macroeconomy is investigated for the period 1966 to 1992. The validity of an (economic) peace dividend resulting from defence cuts and the suitability of defence spending as a policy instrument are then examined. The review of the theory and empirical research on defence spending and .macroeconomic impacts are both conflicting and indecisive. The time series methodology of unrestricted vector autoregression (VAR) allows the data to be represented in a form unprejudiced with preconceived theory. Structural vector autoregression gives form to the model through discriminating lag lengths and/or the construction of an innovation model. Both models are estimated with non-stationary and stationary time series to facilitate Granger causality testing, Impulse response analysis and Forecast error variance (FEV) decomposition analysis. The results provide useful empirical insights, but do not clarify some of the unresolved issues in earlier research. It is concluded that defence spending has a direct impact on unemployment and interest rates (but not inflation or GDP), there is evidence for the existence of a (possibly insignificant) peace dividend resulting from defence cuts and finally defence spending, in general, is not suitable as a policy instrument. The lack of robustness across specifications causes the tentative conclusion that defence has largely insignificant effects upon the overall Australian macroeconomy. Given the moderate size of the .Australian defence sector, this is perhaps not surprising. Also found is the peripheral result of defence spending to be endogenous with respect to GDP. This last result does not validate the underconsumptionist and the military Keynesian schools of thought, however.

 
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