Defence spending and economic performance in the United States: A causal analysis

The causal relationship between defence spending and economic performance in the United States from 1943 to 1989 is investigated using vector autoregression. The evidence indicates that there is no substantial relationship, in either causal direction, between defence spending and the price level, the unemployment rate, or the interest rate. Nor does there appear to be any substantial lagged relationship between defence spending and output. There may be a more immediate causal relationship between defence spending and output, i.e., one which operates on a quarterly or monthly basis, but the existence and direction(s) of such a relationship cannot be determined using annual data. In short, those arguments which link defence spending to poor economic performance receive little empirical support.