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Causality between defence spending and economic growth: THe case of mainland China: A comment
Wolde-Rufael, Yemane. Journal of Economic Studies28.3 (2001): 227-230.

Abstract
This paper challenges the claims of a previous article which tested the long-run relationship between economic growth and defence spending for mainland China for 1950-1991 and stated that the two series were integrated of the same order but not Granger-causally related to each other in any direction. Shows that there is a unidirectional Granger causality running from defence expenditure to economic growth.

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Keywords China, Defence, Economic growth Abstract Challenges the claims of a previous article which tested the long-run relationship between economic growth and defence spending for mainland China for 1950-1991 and stated that the two series were integrated of the same order but not Granger-causally related to each other in any direction. Shows that there is a unidirectional Granger causality running from defence expenditure to economic growth. Introduction In a recent article in this journal, Chen (1993) tested the long-run relationship between economic growth and defence spending for Mainland China for the period 1950-1991. Using the EngleGranger (1987) two-step procedure and the Granger (1988) causality test, Chen (1993) claims that the two series were integrated of the same order but not Granger-causally related to each other in any direction. The purpose of this note is to challenge these two claims and to show that there is a unidirectional Granger causality running from defence expenditure to economic growth in the case of Mainland China. Further unit roots tests Using the conventional Augmented Dickey-Fuller (1981) (ADF) test, Chen (1993) claims that the two series were difference-stationary and integrated of the same order. In this note we shall demonstrate that only the defence spending series was difference-stationary, while the economic growth series was level-stationary. As there are many controversies surrounding the unit root testing, our strategy is to compare results obtained from several of these tests and examine whether the preponderance of the evidence makes a convincing case for stationarity or nonstationarity. For this purpose, we shall use not only the ADF test which Chen himself used but also four other additional unit roots tests of Phillips and Perron (1988), Kwiatkowski et aL (1992), Zivot and Andrews (1992) and, more importantly, the relatively more powerful unit root test of Elliot et al. (1996)[1]. Results of the five unit root tests are presented in XXFIGR FIGREF="tablel.TIF"&amp;gt;Table I. For the levels of the economic growth (EG) series, the null hypothesis of a non-stationary is rejected at the 5 per cent significant level by all the five tests. However, for the defence (DS) series, the null that the series contains unit root is accepted by all the tests. Therefore, there is convincing evidence to indicate that the two series were not integrated of the same order: the EG series was level-stationary, while the DS series was difference-stationary. Hence, as the two series were not I(1), the Engle-Granger (1987) two-step procedure that Chen (1993) used was not appropriate for testing for cointegration[2]. Further evidence of causality Using the first difference of the two series, Chen (1993) claims that there was no Granger-causality in any direction between economic growth and defence spending. As Table I shows, the levels of EG and the first difference of DS are both I(0) and Granger causality tests should have been carried out using these two stationary series and not the first difference of the two series. Results of the

though not robust to the varying lags. This finding. which are both I(0). unlike Chen (1993).4]. Concluding remarks This note has shown that defence spending and economic growth in China were not integrated of the same order and it was not appropriate for Chen (1993) to use the Engle-Granger two-step procedure and the Granger (1988) causality tests. we find that there was a unidirectional Granger causality running from defence spending to economic growth.causality tests using the levels of the economic growth series and the first difference of the defence expenditure series are presented in Table II. implying that defence spending promoted economic growth in China. . Granger causality tests should have been based on the levels of economic growth and the first difference of the defence spending series. The Table indicates that there was a unidirectional Granger causality running from defence spending to economic growth. Using these two stationary series. implies that defence spending promoted economic growth in China[3.

Table I. .

813-36. 1057-72. 20 No. pp. P. One of these tests is the procedure proposed by Elliot et al. E. Vol. pp. References Chen. Kurozumi. Inc. "Modified lag augmented vector autoregressions". This was robust to varying the lag length. Y. Johansen. both the residual-based cointegration tests due to Engle-Granger (1987) and the Johansen (1988) procedure clearly show that the two series were cointegrated. Ng. Econometrica. . (1987). John Wiley &amp. see Cheung and Lai (1995) and Pantula et al.B. Oxford Bulletin of Economics and Statistics. However. pp. When we applied the Toda and Yamamoto (1995) lag-augmented Granger non-causality test..S. he would also have found that there was a unidirectional Granger causality running from defence expenditure to economic growth. and for the main shortcomings of the approach.H.Table II Notes 1. Granger. D. It now well-known that the conventional unit root tests often have lower power against plausible stationary alternatives.amp. C.F. 64 No. estimation and testing". (1996). "Efficient tests for an autoregressive unit root". Econometrics Review. 55. 3. 39. (1995). and Yamamoto. 411-19. that has a better performance in terms of small-sample size and power. with the evidence presented in Table I. 90 No. Kwiatkowski.G. Econometrica. (1994). T. (1994). However.. S. 199-211. Vol. 2. Vol. and Shin. and Perron. and Stock. Journal of Econometrics.Journal of Economic Studies. 429. K. 2. 54. and Fuller. "A comparison of unit-root test criteria"journal of Business and Economic Statistics. Schmidt. instead of the I per cent significant level. R. Dickey.. C. New York. Needless to say. Vol. (1995). 268-81. 37-43. (2000). this exercise may seem a heresy. "Lag order and critical values of a modified Dickey-Fuller test".H. G. 12. see Kurozumi and Yamamoto (2000). Journal of Economic Dynamics and Control. "Co-integration and error-correction: representation. Enders. "Unit root tests in ARIMA models with data dependent method for the selection of the truncated lag". 449-59.159-78. 57 No. J. pp. Vol. S. pp.. D. 4. 231-54. "Developments in a concept of causality". see Rambaldi (1997). W.A. Both the ADF tests of the residuals and the CRDW from the cointegrating equation are significant. 4.A. and Fuller. 49. numerous modifications have been proposed in order to increase the power of the tests. pp. Phillips. Engle. "The likelihood ratio statistics for autoregressive time series with a unit root". P. Gonzalez-Farias. Econometrica. As a result. 207-31. Vol. W. the cointegration tests based on the Johansen procedure are also robust to varying the VAR length. Rothenberg. had Chen accepted the 5 per cent significant level for his F-test. 3.A. (1995). this exercise may again seem a heresy.Wj. pp. we found that there was a unidirectional causality running from defence expenditure to economic growth. 251-76.. 12 No. Elliot. Cheung. Journal of the American Statistical Association. "Causality between defense spending and economic growth: the case of mainland China". and Lai. For a lucid presentation of the above procedure. (1981).C. with the evidence presented in Table I. (1988). pp. "Testing the null hypothesis of stationarity against the alternative of a unit root". pp. Journal of Econometrics. Vol. For a concise summary. NY. Sons. Y-W. (1988). S. (1993). P. and Granger. Applied Econometric Time Series. 19 No. Vol. Vol.Wj. Pantula. C. "Statistical and hypothesis testing of cointegration vectors". (1992). Vol. G. TJ. 6. pp. Vol. W. (1996). 4. If we agree with Chen that the two series were I(1). pp. Moreover.

"Effects of model specification on tests for unit roots in macroeconomic data". H. B. pp. 9130 Experimental/ theoretical Judul Wolde-Rufael. P. and Yamamoto. Vol. and Pesaran. pp. 20. 10 No. 1130 Economic theory. The usual disclaimer applies. University of New England.0 Interactive Econometrics Analysis. UK The author is grateful to two anonymous referees and to the Editor of the Journal for many useful comments and suggestions on an earlier draft of the paper that have enhanced its quality and content. G. Journal of Business and Economic Statistics. Vol. pp. 66. Studies.Journal of Econometrics.W. 335-46. "Statistical inference in vector autoregressions with possibly near integrated process". 335-46. Rambaldi.W. London Borough of Camden.Y. Schwert. Oxford. A. Working Papers in Econometrics and Applied Statistics. Department of Econometrics. Australia. (1988). 75. (1987). Oxford University Press. He is especially grateful to one of the anonymous referees for suggesting that he use a more powerful unit root test other than those conventionally used and also for suggesting that he also use causality tests in order to build a convincing case for challenging Chen's (1993) results. D. Causality. 73-103. "Further evidence on the great crash. and Andrews. Phillips. M. Working with Microfit 4.C.proquest. "Test for a unit root in time series regression". E. Journal of Monetary Economics. Indexing (details) Defense spending.K. (1997). 251-70. 3. Vol. Biometrika. Economic growth.B.Pesaran. Zivot. Yemane Wolde-Rufael Social Services Department. T. London.H. Toda. (1997). pp. (1992). Statistical analysis China 9179 Asia & the Pacific. Yemane Journal of Economic Studies Volume Edisi Halaman Jumlah halaman Tahun publikasi Tanggal Publikasi Tahun Penerbit Tempat Publikasi Negara Publikasi Business And Economics ISSN Jenis sumber Bahasa Publikasi Jenis Dokumen ID Dokumen ProQuest http://search. Vol. the oil price shock and the unit root hypothesis". "Multiple time series models and testing for causality and exogeniety: a review". (1995). P.com/docview/220665823?accountid=132811 . and Perron.

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