This paper examines the relationship between Defence Expenditure (DE) and Gross Domestic Product (GDP) in Sri Lanka using co-integration, and causality tests for the period 1975-2005. The long-run co-integration vector relating to Gross Domestic Product (GDP) and Total Public Expenditure (TE) is positive. The vector indicates that in the long-run there is a positive long-run relationship between Gross Domestic Product (GDP) and Total Public Expenditure (TE). Further the results indicate that in the long-run the defence expenditure affects negatively the economic growth of the country. Next, we proceed with causality tests to see, if there is any causal relationship between GDP, DE, and TE wherein the government plays a major role in the economy and large proportions of spending go to the defence. (The results show that the null hypothesis of GDP does not granger cause TE, and DE does not granger cause TE can reject in the empirical analysis.) In other words, GDP and DE are seen as granger causing TE.
Keywords: Gross Domestic Product (GDP), Total Public Expenditure (TE), Defence Expenditure (DE), Granger causality, Co-integration
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Phd Student, Meijo University, Japan