Citation

Olszewski EA, Payne JE, Ross KL. Defence economics 1993; 4(3): 249-258.

Copyright

(Copyright © 1993, Informa - Taylor and Francis Group)

DOI

10.1080/10430719308404764

PMID

unavailable

Abstract

This paper re-examines the relationship between U.S. defense spending and the dollar-mark exchange rate during the 1960:1 to 1990:4 period. Previous work, under the guise of the “safe haven” argument, finds a cointegrating relationship between real military expenditures, real output and the real dollar-mark exchange rate. Here, we examine the dynamic time series properties of a cointegrated vector autoregression under a more traditional real exchange rate specification. Through various restrictions placed upon the estimated cointegrating vector, we test specific hypotheses about the long-run relationships between the variables. Our results reveal that previous work suggesting that military expenditures may significantly affect the real dollar exchange rate value may be misleading.