Military spending and economic growth: The case of Iran

Over the last decade, the Iranian government budget on military has been higher than the average of the world. The current increasing international sanctions aim to reduce the military capabilities and capacities of the Iranian government. We analyze the response of the Iranian economy to shocks in its military budget from 1959-2007, using Impulse Response Functions (IRF) and Variance Decomposition Analysis (VDA). The Granger causality results show that there is unidirectional causality from the military spending growth rate to the economic growth rate. The response of income growth to increasing shocks in the military budget is positive and statistically significant.