The Effects of Geopolitical Risk Index on Military Expenditures

In recent years, investigating the impact of the geopolitical risk index on military expenditures is a current issue in the literature. The study investigates the effects of geopolitical risk index on military expenditures in 25 OECD countries for the period 1999-2022. We tested the impact of geopolitical risk index on military expenditures with the dynamic panel data models that we used for the first time in the military expenditures- geopolitical risk index literature. In the study military expenditures are the dependent variable, geopolitical risk index is the main independent variable, and trade openness is the control variable. Four dynamic panel estimation methods were employed in the analysis, namely pooled OLS, fixed effects OLS, difference GMM, and system GMM. Dynamic panel data analysis gives permission stronger estimations for heteroscedasticity, internality and autocorrelation. The geopolitical risk index variable demonstrated statistical significance at the 1% level and geopolitical risk index positively affects military expenditures in the pooled OLS, fixed effects OLS, and difference-2 GMM models. The two-stage system GMM estimation yielded more favorable and robust results. Two-stage system GMM method gave more reliable results. We conclude that the effect of the geopolitical risk index on military expenditures is positive and geopolitical risk index raises military expenditures in OECD countries.