Military spending as another cause of the failure of the PPP

Abstract

In a recent article, with a strong theoretical argument but poor empirical
support, military spending was identified to be a determinant of real
exchange rate or a factor causing the PPP to deviate from equilibrium
exchange rate. The poor empirical results were mostly due to a small number
of observations (21 cross-sectional). This article employs pooled data from
across 37 developing countries over the 1985–1998 period and provides very
strong empirical support for the notion that indeed increased military
spending could cause the PPP to deviate from equilibrium exchange rate