Military Threats and Growth:A Small Open Stochastic Growth Model

Abstract

This paper sets up a small open stochastic endogenous growth model to analyze the impact of foreign military threats on the home long-run economic growth rate and welfare. We prove that, in addition to the intertemporal substitution elasticity in consumption, whether the home country is a net creditor or not is also an important factor in determining the growth effect and the welfare effect of foreign military threats. We find that if the home country is a net creditor, the relationship between foreign military threats and the home long-run economic growth rate is positive. On the contrary, if the home country is a net debtor, the effect of foreign military threats on the home long-run economic growth rate is negative.