The Military Expenditure-external Debt Nexus: New Evidence from a Panel of Middle Eastern Countries

This paper examines the impact of military expenditure and income on external debt for a panel of six Middle Eastern countries; namely, Oman, Syria, Yemen, Bahrain, Iran, and Jordan, over the period 1988 to 2002. Using Pedroni's (2004) test for panel cointegration, we find that there is a long-run relationship between external debt, military expenditure and income. The estimated long-run elasticities suggest that an increase in military expenditure contributes to a rise in external debt, while an increase in income helps the Middle Eastern countries to pay off their external debt. * School of Accounting, Finance and Economics, Deakin University. † Department of Economics, Monash University. ‡ We thank the Editor and three referees for helpful comments on an earlier version of this paper and Felicity Milne and Xiaolei Qian for research assistance. © 2007 Paresh Kumar Narayan and Russell Smyth All rights reserved. No part of this paper may be reproduced in any form, or stored in a retrieval system, without the prior written permission of the author.