The asymmetry in the effects of defense spending shocks on economy : an emprical analysis for Turkey

Abstract

The purpose of this study is to asses, whether or not the expansionary and contractionary defense spending shocks have asymmetric effects on the Turkish economy. It is widely believed that decrease in the government spending resulted from decrease in defense spending — although there is no guarantee that savings on defense spending would be applied to deficit reduction—will be followed by decrease in prices providing stability in the market. But contrary to these beliefs there can be asymmetry in the effect of defense spending innovations because of some factors. We have investigated the reactions of macroeconomic variables— real income, prices, money, exchange rate, and employment— to the defense spending innovations by applying vector autoregression (VAR) methodology. The empirical evidence reported here gives evidence on that there is statistically significant asymmetric effect on real income (positive defense spending shock increases the real income) and on price level (positive defense spending shock decreases price level), but there is no statistically significant evidence on the effect of expansionary and contractionary defense spending on: money supply, exchange rate, and employment variables.