Macro-Financial Adjustment of the Defense Burden: Exchange-Rate Exposure, Import Dependence, and Price Dynamics

Abstract This article reconceptualizes military expenditure as a macro-financial commitment rather than as an isolated annual budgetary outlay. Using a balanced annual panel of 25 countries over 2005–2021, it examines how the defense burden is linked to price dynamics, real exchange-rate conditions, and import dependence. The empirical strategy explicitly accounts for cross-sectional dependence and combines Dumitrescu–Hurlin predictive information-flow tests, CIPS/PANIC unit-root diagnostics, benchmark and bootstrap cointegration checks, a system-based Vector Error Correction Model, generalized impulse responses, variance decompositions, and CCE-type robustness checks. The results indicate that exchange-rate and import-capacity conditions contain predictive information for the defense burden, while military expenditure contains predictive information for the consumer price level. Cross-sectional dependence is pervasive, and the long-run evidence becomes more cautious once common factors are considered: Johansen diagnostics support one system-based relation, whereas Westerlund bootstrap tests do not reject the null of no cointegration. The VECM is therefore interpreted as evidence of dynamic adjustment rather than definitive proof of cross-sectionally robust panel cointegration. The defense-burden equation displays weak short-run self-correction, consistent with the fiscal rigidity of procurement, personnel, and maintenance commitments. Adjustment appears more visible through price, exchange-rate, and import-capacity channels. CCE-type robustness checks preserve the relevance of price dynamics and import dependence. The findings suggest that defense sustainability should not be evaluated solely through the military-expenditure-to-GDP ratio. Imported content, foreign-currency exposure, procurement timing, maintenance dependence, and price-level pressures should also be incorporated into a macro-financial risk framework.