corresponding author

Many studies have examined the relationship between defense spending and growth in real aggregate output, with mixed results. Most recently, Atesoglu (2002) uses time series analysis and finds a positive relationship between defense spending and output. Capturing the error correction term as the long run adjustment parameter and including the long run adjustment in the relationship, we do not find evidence that defense spending promotes growth in real output. We re-estimated the relationship and dummied all U.S. involvements in a military conflict, with similar results concerning military spending’s effect on output. Interestingly, we do find tradeoffs between defense and non-defense government spending during war time, but not during periods of peace. 1 The question of military spending and its effect on growth has received much attention over the last 20+ years. To answer the question, there are two distinctly different approaches used in the literature, the production function framework credited to Feder (1982), and an aggregate, time series modeling approach. We think the question, which has not bee