Geopolitical risk and military expenditures: Evidence from the US economy

Abstract

Exploring the nexus between geopolitical risk (GPR) and military expenditures (ME) has been limited during the past period. It is justified by the absence of a well-published proxy for GPR. Recently, the work of Caldara and Iacoviello (2022) stimulated scholars to examine the consequences of GPR. Our paper seeks to understand the relationship between GPR and ME in the United States (US). It designs a theoretical framework and computes an econometric model using the Autoregressive Distributed Lag methodology based on annual data (1960–2021). In addition, it uses the pairwise Toda–Yamamoto causality test. The results show that the relationship between GPR and ME is one of unidirectional causality and runs from ME to GPR in the US. Further, this relationship is statistically significant and positive in the short and long run. This finding supports our hypothesis that the USGPR is a consequence of resource allocation, i.e., ME, and can be controlled, directed, and mitigated. Thus, ME is a tool to achieve the US international hegemony’s strategic goals. From a policy implication perspective, it has been proved that GPR has broad negative consequences for various economies. Thus, moving toward cooperation and coordination with other nations instead of accumulating ME tends to support the international economy.