An Examination of the Effects of Military Expenditure on Key Macroeconomic Variables of Iran through the DSGE approach

Document Type : Original Article

Authors

1 Associate Professor, Department of Economics, Faculty of Islamic Studies and Economics, Imam Sadegh University, Tehran, Iran.

2 Ph.D. Student in Economics, Institute for management and planning studies, Tehran, Iran.

Abstract

The question of the direction and extent of the relationship between military spending and economic growth has perhaps been one of the most contentious macroeconomic issues
discussed by economists during the past decades. Thus far, numerous studies have been conducted in different countries around the world on this subject that have produced varied and often contradicting answers to this question. This article, by employing a Stochastic Dynamic General Equilibrium modeling approach, isolates the effects of military expenditure on various economic sectors, including households, enterprises, and the government, to examine how military expenditure affects macroeconomic variables in Iran. In so doing, the methodology of this paper utilizes the Bayesian estimation method to determine the structural parameters of the model. For this purpose, seasonal time series data on GDP, Consumption and Military spending for the 1988 to 2020 period were obtained from the Central Bank of Iran and SIPRI. The results obtained from the simulation output of the variables in the model indicate the positive effect of military spending on production and consumption growth. Considering the status of national security as a public good, in conjunction with the effect of military spending on output in economic models, households, and enterprises as the two key sectors in general equilibrium model benefit greatly from the enhancement of national security and its associated industries. It should be noted that even though the effect military spending on output has been positive, based on the output of analysis of the variance of the model, productivity and technological shocks are the most significant factors in creating sustainable changes in production and other real macroeconomic variables.

Keywords

Defense Economics and Sustainable Development
Volume 7, Issue 23
June 2022
Pages 9-35

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