Analysis of the economic effects of defence spending in Spain: a re-examination through dynamic ARDL simulations and kernel-based regularized least squares

Spain’s economic growth over the last few decades constitutes a rather distinctive case in post-World War II Europe, which has attracted international academic interest. This paper examines the relationship between Spain’s military expenditure and economic growth during the period 1954-2021 to shed further light. Using the recently developed method of Dynamic Autoregressive Distributive Lag (DARDL) simulation proposed by Jordan and Philips (2018) and the Kernel-Based Regularized Least Squares (KRLS) technique which accounts for potential non-linearities, interactions, and heterogeneous effects, this paper tests the short and long–run equilibrium relationship between military expenditure and economic growth in Spain. Furthermore, with the cumulative sum (CUSUM) and cumulative sum of squares (CUSUMSQ) tests, we examine the stability of the above relationship. The results show that there is a positive short and long–run relationship between military expenditure and economic growth in Spain during the period under study. However, when we stratify our sample (before and after Spain’s democratization), the positive relationship is sustained only during the years of the non–democratic regime. This has further policy implications as policymakers in Spain need to carefully balance national security concerns with the need for sustained economic growth.