Long-Run Equilibrium Between Military Expenditure and GDP with Non-Linear Structural Breaks in NATO Member States

This paper studies stationarity and cointegration of military expenditure and GDP for two subsamples of NATO member states. In particular, we employ newly developed unit root and cointegration tests which approximate an unknown number of smooth structural shifts in the low-frequency components of a Fourier expansion. The new unit root test indicates that military expenditure and GDP are non-stationary. Given the presence of several gradual shifts in the cointegration regression, our empirical results support the existence of stochastic comovement between military expenditure and GDP in the NATO member states. Additionally, we identified that income elasticities of the new member states are larger than those of the old member states, which implies that new member states appear to be more flexible, with their military expenditures more easily scaled up or down in accordance with economic performance.