Estimating Optimal Military Spending Policy in DSGE Model: Empirical vs Theoretical Approach

Abstract

Public spending on defense has become one of the most recent and complex research topics in macroeconomic policy analysis, which affects both economic growth and the welfare of society. Literature demands works that address the optimal calculation of military spending. This paper tries to respond to the estimation approach used to calculate military spending. Both a DSGE model (theoretical approach), a VAR model (empirical approach) and a DSGE-VAR model (combined approach) are developed. Our results indicate that the DSGE-VAR model offers the most robust estimates with minor deviations, closely followed by the DSGE model.