UNITED-STATES MILITARY EXPENDITURE AND THE DOLLAR - ANOTHER LOOK

This paper re-examines the relationship between U.S. defense spending and the dollar-mark exchange rate during the 1960:1 to 1990:4 period. Previous work, under the guise of the ''safe haven'' argument, finds a cointegrating relationship between real military expenditures, real output and the real dollar-mark exchange rate. Here, we examine the dynamic time series properties of a cointegrated vector autoregression under a more traditional real exchange rate specification. Through various restrictions placed upon the estimated cointegrating vector, we test specific hypotheses about the long-run relationships between the variables. Our results reveal that previous work suggesting that military expenditures may significantly affect the real dollar exchange rate value may be misleading.