Defense Budget Growth and Inflation: A Wavelet-Based Study of the U.S. and Britain
| Author | Yu Wang |
| DOI | http://doi.org/10.1177/14789299211068407 |
| Published date | 01 May 2023 |
| Date | 01 May 2023 |
| Subject Matter | Articles |
https://doi.org/10.1177/14789299211068407
Political Studies Review
2023, Vol. 21(2) 260 –284
© The Author(s) 2022
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DOI: 10.1177/14789299211068407
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Defense Budget Growth and
Inflation: A Wavelet-Based
Study of the U.S. and Britain
Yu Wang
Abstract
Despite the extensive theoretical connections between defense budget growth and inflation,
empirical findings based on traditional time-domain methods have been inconclusive. This study
reexamines the issue from a time–frequency perspective. Applying continuous wavelet analysis
to the U.S. and Britain, it shows empirical evidence in support of positive bilateral effects in both
cases. In the bivariate context, U.S. defense budget growth promoted inflation at 2- to 4-year
cycles in the 1840s and at 8- to 24-year cycles between 1825 and 1940. Conversely, inflation
accelerated defense spending growth at 5- to 7-year cycles in the 1830s and at 25- to 64-year
cycles between 1825 and 1940. Similarly, British defense budget growth spurred inflation at 8- to
48-year cycles between 1890 and 1940 and at 50- to 65-year cycles between 1790 and 1860.
Inflation fueled the growth of defense spending at 7- to 20-year cycles between 1840 and 1870,
in the 1940s, and in the 1980s. Preliminary results from multivariate analyses are also supportive,
though there is a need for further research that is contingent on advancements in the wavelet
method in the direction of simulation-based significance tests.
Keywords
defense spending, inflation, time series, United States, Britain
Accepted: 3 December 2021
Introduction
The socioeconomic consequences of expansionary defense spending have long been a
subject of academic interest. For macroeconomists and central bankers, this field is criti-
cal for evaluating how fiscal policy instruments enhance the overall performance of the
economy. For political economists, it offers a classic example of how government deci-
sions based on political calculations can distort the self-governance of the market.
National security strategists and peace scientists can use new insights in this area to better
Department of International Studies, Xi’an Jiaotong-Liverpool University, Jiangsu, China
Corresponding author:
Yu Wang, Department of International Studies, Xi’an Jiaotong-Liverpool University, HS 417, No. 8
Chongwen Road, Suzhou Industrial Park, Jiangsu 215123, China.
Email: Yu.Wang02@xjtlu.edu.cn
1068407PSW0010.1177/14789299211068407Political Studies ReviewWang
research-article2022
Article
Wang 261
assess the feasibility of national security policies. Given the significance of the question,
it is not surprising to see ever-growing research interest in topics such as the guns–butter
trade-off in government budget formation and its implications for socioeconomic
development.
As part of the broader inquiry into the socioeconomic consequences of expansionary
defense spending, this study empirically tackles the nexus between defense budget growth
and inflation. The current research is motivated by a puzzle that becomes immediately
apparent upon review of the present literature. On one hand, writings by macroecono-
mists, political economists, and peace scientists have provided multiple mechanisms by
which interplays between defense budget growth and inflation can be theoretically estab-
lished. On the other hand, empirical findings on the issue have been highly ambiguous
and inconclusive. This research argues that the inconsistency between the theoretical
expectation and the empirical result is a reflection of the methodological challenges posed
by the complicated relationship between defense budget growth and inflation. Specifically,
the challenges can be summarized in four aspects. They are cross-national heterogeneity,
demand for long time-series data, the nonlinear relationship between defense budget
growth and inflation, and the need to separate the variance in the frequency domain from
that in the time domain. With due attention paid to the four methodological challenges,
this study reexamines the relationship from a time–frequency perspective. By applying
continuous wavelet analysis to the U.S. from 1793 to 2019 and Britain from 1751 to 2019,
this study shows empirical evidence in support of positive bilateral effects between
defense budget growth and inflation in both the cases.
The rest of this study is organized as follows. Part 2 reviews the theoretical and empiri-
cal writings on the nexus between defense budget growth and inflation. Part 3 introduces
the data and method involved. Part 4 operates bivariate analysis and reports the results.
Part 5 provides a preliminary analysis in a multivariate context. Part 6 concludes by sum-
marizing the findings of this study, highlighting their implications, and pointing out valu-
able research directions for the future.
The Nexus Between Defense Budget Growth and Inflation
The positive effect of expansionary defense spending on inflation can be theoretically
established through the following four mechanisms. First, an increase in defense spend-
ing might increase inflation from the demand side. According to both the classical and
Keynesian models, inflation occurs when the aggregate demand exceeds the aggregate
supply (Abel et al., 2014). Because defense spending takes up a considerable portion of
the overall government budget, and that budget is in turn an integral part of the aggregate
demand, unless expansionary defense spending is offset by higher taxes and/or lower
spending in other areas, it can give rise to inflation through the well-known mechanism
of demand-pull (Hartman, 1973; Schultze, 1981). Regarding the question of why the
government would increase defense spending even during peacetime, the answers can be
divided into a Keynesian camp and a political economy camp. The Keynesian version
sees defense spending as a crucial fiscal instrument for addressing unemployment and
recession (Alptekin and Levine, 2012; Atesoglu, 2002; Nincic and Cusack, 1979). The
political economy version, by contrast, emphasizes the role of ambitious politicians,
budget-maximizing bureaucrats, defense industry lobbyists, or some combination of the
three in pushing for greater defense spending (Calleo, 1981; Kaufman, 1972; Niskanen,
1968, 1996). It is important to note, however, that the division between the two camps of
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