Journal of Business & Economic Policy

Military Spending and Unemployment: a panel Smooth Transition Regression Approach
Emmanuel Anoruo, Uchenna Akpom, Young D. Nwoye

Abstract
This paper examines the empirical relationship between military spending and unemployment rates for a panel of 8 African countries using the panel smooth transition regression (PSTR) approach. This study adopts the PSTR model because of its ability to account for nonlinearity and/or heterogeneity and time instability that may be present in the panel. The PSTR model was estimated with a model with one transition function and one location parameter as dictated by the diagnostic tests. The diagnostic tests reveal that the relationship between unemployment rates and military spending is nonlinear. The results reveal that increases in military spending have significantly positive effect on unemployment rates in regime one; associated with low inflationary periods. However, in the second regime or high inflationary periods, increases in military spending deter unemployment. These results confirm that the relationship between unemployment rates and military spending is asymmetric and hence should be modeled accordingly. Policy wise, the results suggest that military spending should be increased during low inflation regime to mitigate the problem of unemployment. However, military spending is inconsequential during high inflation regime.

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