Military spending as another cause of the failure of the PPP

In a recent article, with a strong theoretical argument but poor empiricalsupport, military spending was identified to be a determinant of realexchange rate or a factor causing the PPP to deviate from equilibriumexchange rate. The poor empirical results were mostly due to a small numberof observations (21 cross-sectional). This article employs pooled data fromacross 37 developing countries over the 1985–1998 period and provides verystrong empirical support for the notion that indeed increased militaryspending could cause the PPP to deviate from equilibrium exchange rate