Abstract:
The purpose of this research is to investigate the causal relationship between economic growth and defense expenditure in Sri Lanka over the period 1950-2006. This study employs Granger causality tests using annual time series data to analyze the presence and direction of causality between economic growth and defense expenditure. In addition to analyzing causality, the study focuses upon the appropriate representation of the nature of non-stationaries apparent in these two economic time series. Moreover, co-integration testing and error correction mechanism also used to analyze the long run relationship between the two variables. The results suggests that there is a uni-directional causal relationship between economic growth and defense expenditure. That is economic growth causes military expenditure in Sri Lanka.
