Causality and Co-integration Relationships between Defense Expenditures and Economic Growth in China1

Abstract: The causality and co-integration relationships between defense expenditures and economic growth are examined over the period of 1978-2013. Co-Integration Test and Granger Causality Tests are used to analyze whether defense expenditures have effects on economic growth as well as the direction of causality between them. The vector auto-regression model is built to investigate short term dynamics and long term equilibrium relation. Using the time series data from 1978 to 2013 in China, the empirical results reveal that there is only one co-integration relation between defense expenditures and GDP which is the Granger Causality of defense expenditures, but not vice versa. Key words: Defense expenditures，GDP，Co-Integration，Vector auto-regression model，Vector error correct model，Granger causality tests