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Browsing by Author "Gråsten, Emilia"

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  • Gråsten, Emilia (2022)
    The opportunity costs of defence and the impact of defence spending on economic growth aroused the interest of researchers during the Cold War. The question is topical again, as the war in Ukraine has accelerated international armaments and increased investments in defence. For Finland and Sweden, the issue is also important in terms of future NATO membership, because NATO recommends that its member countries spend at least 2% of GDP on defence. Achieving the limit requires an increase in defence spending from both countries. No case studies on the impact of defence spending on economic growth have been published about Finland and Sweden, but the countries have been discussed as part of broader panel materials. This thesis fills the gap. The thesis applies structural vector autoregressive methods to analyse the period from 1960 to 2021. Granger causality is included in the analysis, because–despite its problematic nature–the concept has a central position in the history of the research topic. Previous literature has considered the identification of a structural model challenging because the determination of bidirectional causality would require a suitable exogenous variable, which is almost impossible to find in this context. The view is challenged by suggesting that a partial identification can be accepted when the interest is focused only on the defence spending shock. The alternative analysis concerning a shorter time period tests the sensitivity of results to a time period. The impulse response analysis suggests that the impact of defence spending on GDP is slightly positive for both countries, but statistically significant only for Sweden. Granger causality is not observed in either direction for either country. Finland's neutral result is in line with expectations and previous literature, but Sweden's positive result is contrary to expectations. The alternative analysis concerning the post-Cold War era confirms that the Finnish result is robust regardless of the time period. The inconsistency with previous literature and the challenges caused by conditional heteroskedasticity raise doubts about the reliability of the Swedish result. The thesis indicates that increases in defence spending will not harm economic growth in Finland and Sweden. The result is surprising, as it has been suggested that previous studies have underestimated the negative impact of defence spending and most of the recent literature supports a negative or neutral impact. Further research is needed, especially on the impact mechanisms and the causes of heterogeneity. Decomposing defence spending could provide answers to unresolved questions.