Military Spending and Economic Growth in China: A Regime-Switching Analysis

Abstract

This article investigates the impact of military spending changes on economic growth in China over the period 1953 to 2010. Using two-state Markov switching specifications, the results suggest that the relationship between military spending changes and economic growth is state dependent. Specifically, the results show that military spending changes affect economic growth negatively during a slower growth-higher variance state, while positively within a faster growth-lower variance one. It is also demonstrated that military spending changes contain information about the growth transition probabilities. As a policy tool, the results indicate that increases in military spending can be detrimental to growth during slower growth-higher volatility periods.

Keywords: China; Economic growth; Markov-switching; Military spending

JEL Classification: C22, H30, O40