THE RELATIONSHIP BETWEEN DEFENSE SPENDING AND MAJOR MACROECONOMIC VARIABLES

Onur ÖZSOY (Ankara University)

This paper empirically analyzes and explores the relationship between defense expenditures and the major macroeconomic variables such as inflation, interest rates, unemployment, economic growth, and balance of trade in Turkey for the time period of 1970 to 1998. Using a single equation multi-variable regression model, the relationship between major macroeconomic variables and defense expenditures are estimated. Regression equations are estimated by basic OLS procedure. A negative relationship between economic performance measured by annual growth rate of GNP and defense spending is found. Additionally, this study found a positive relationship between defense spending and inflation. However the estimated sign of inflation is statistically insignificant at any level of significance. Moreover, real interest rates and share of balance of budget in GNP have negative impact on defense spending. The relationship between defense spending and unemployment is found to be negative, indicating that huge defense spending utilizes underused capacity and resources and thus increases the level of output. This eventually reduces unemployment. The result of this study also indicates that there is no causal relationship in either direction between defense spending and macroeconomic variables.