Military buildup and economic growth

Military Buildups&

Economic Growth

Kenwin Maung

Agenda

1. Review of Ramey and Shapiro (1998)

2. My ARDL Model Specification

3. Inference and Comparison

Costly capital reallocation and the effects of government spending (1998)

𝒚 𝒕=𝜶𝟎+𝜶𝟏𝒕+𝜶𝟐(𝒕≥𝟏𝟗𝟕𝟑 :𝟐)+∑𝒊=𝟏

𝟖𝒃𝒊 𝒚 𝒕−𝟏+∑

𝒊=𝟎

𝟖𝒄𝒊𝑫𝒕−𝒊+𝝐𝒕

Where: is the endogenous variable is a time trend starting from 1947:1 and is a time trend starting from 1973:2 is the buildup dummy taking1 for 1950:3, 1965:1, and 1980:1

Sample period 1947:1 to 1996:4

Review of Ramey & Shapiro

Costly capital reallocation and the effects of government spending (1998)

“Our military buildup dummy has considerable explanatory power. In a regression of real GDP growth on eight lagged

values of log level of real GDP (and time trends), adding the current and eight lagged

values of the dummy variable raises the R-squared from 0.218 to 0.321. The p-value for the F-test of the joint significance of the

buildup dates variables is 0.003.”

(pg. 179, 1998)

Review of Ramey & Shapiro

Costly capital reallocation and the effects of government spending (1998)

Review of Ramey & Shapiro

Ramey & Shapiro(1998)

Me

R squared for equation without buildup dummies

0.218 0.200

R squared for equation with buildup dummies 0.321 0.282

P value of F test for dummy variables 0.003 0.026

My model specification

Data definitions

Real GDP Real Personal Consumption Expenditure

• Billions of chain-weighted 2009 dollars

(weights are adjusted from year to year in calculating a price index)• Quarterly and Seasonally

adjusted

• Billions of chain-weighted 2009 dollars

• Quarterly and Seasonally adjusted

• Includes durable, non-durables, and services (National income & Product Accounts)

𝑮𝒓𝒐𝒘𝒕𝒉𝒓𝒂𝒕𝒆𝒐𝒇 𝒚=𝒚 𝒕

𝒚 𝒕−𝟏𝐱𝟏𝟎𝟎

My model specification

Tweaking the model

𝒚 𝒕=𝜶𝟎+𝜶𝟏𝒕+𝜶𝟐(𝒕≥𝟏𝟗𝟕𝟑 :𝟐)+∑𝒊=𝟏

𝟖𝒃𝒊 𝒚 𝒕−𝟏+∑

𝒊=𝟎

𝟖𝒄𝒊𝑫𝒕−𝒊+𝝐𝒕

1. Dropping the trends

2. Determining the lags for the endogenous variableReal GDP Growth Real Consumption Growth

BIC 1 2

AIC 1 2

My model specification

Determining dummy lags

GDP Growth: 8 Dummy lags 7 Dummy lags 6 Dummy lags

Growth(-1) 0.383(0.069)

0.381(0.069)

0.389(0.068)

Dummy -3.957(2.295)

-3.951(2.320)

-3.944(2.317)

Dummy(-1) 1.432(2.264)

1.420(2.287)

1.487(2.284)

Dummy(-2) 4.149(2.262)

4.142(2.286)

4.189(2.283)

Dummy(-3) 3.631(2.283)

3.634(2.308)

3.651(2.305)

Dummy(-4) -5.913(2.292)

-5.908(2.318)

-5.900(2.314)

Dummy(-5) 1.711(2.275)

1.693(2.299)

1.777(2.294)

Dummy(-6) -3.927(2.261)

-3.934(2.286)

-3.883(2.282)

Dummy(-7) -2.235(2.275)

-2.253(2.298)

Dummy(-8) 3.113(2.274)

P value of F-test = 0.009

My model specification

Determining dummy lagsCons growth 8 Dummy lags - -

Cons Growth(-1) 0.104(0.073) - -

Cons Growth(-2) 0.257(0.073) - -

Dummy -2.433(0.500) - -

Dummy(-1) 0.659(0.522) - -

Dummy(-2) 0.004(0.522) - -

Dummy(-3) -0.046(0.493) - -

Dummy(-4) -0.555(0.489) - -

Dummy(-5) -0.319(0.490) - -

Dummy(-6) -0.199(0.490) - -

Dummy(-7) -0.238(0.488) - -

Dummy(-8) 0.950(0.488) - -

P value of F-test = 0.0007

Interpretation & Comparison

Estimated lag distribution:Military buildup on real GDP Growth

0 1 2 3 4 5 6 7

-8

-6

-4

-2

0

2

4

6

8

Lag

% c

hang

e to

GDP

Quarter

Bold line = Coefficient + Constant

% C

hang

e to

GD

P

Interpretation & Comparison

Quarter

0 1 2 3 4 5 6 7

-8

-6

-4

-2

0

2

4

6

8

Lag

% c

hang

e to

GDP

Total GDP

% C

hang

e to

G

DP

Bold line = Coefficient + Constant

0 2 3 4 5

0 1 2 3 4 5 6 7 8 9

-3-2.5

-2-1.5

-1-0.5

00.5

11.5

2

Lag

% C

hang

e to

Con

-su

mpt

ion

Interpretation & Comparison

Estimated lag distribution:Military buildup on real Cons Growth

Quarter

Bold line = Coefficient + Constant

% C

hang

e to

Con

sum

ptio

n

0 1 2 3 4 5 6 7 8 9

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

Lag

% C

hang

e to

Con

sum

ptio

n

Interpretation & Comparison

Bold line = Coefficient + Constant

Thank

you

Kenwin Maung

GDP Growth:• Increases for 3-4 quarters/lags• Followed by temporary decline &

short pick-up

Cons Growth:• Immediate decline in consumption• Consumption increases after 2

years/8 lags later