The Causal Relationship between Military Spending and Unemployment in the EU15

Abstract

This paper analyses the possible presence of Granger causality between military spending and unemployment rates in the EU15 countries. The panel bootstrap test applied allows us to control for both the presence of cross-country heterogeneity and cross-sectional dependence. Considering two alternative measures of military spending, we find little evidence against the null hypothesis according to which it does not cause unemployment. These statistically significant causal relationships are found in countries that devote a higher share of their defence budget expenditures to personnel.

Keywords: Defence spending, unemployment, causality, SUR estimation, bootstrap

JEL Classification: C32, E24, H56, O40, O57