Unobserved Common Factors in Military Expenditure Interactions Across MENA Countries

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Abstract

In this paper we explore the patterns of interactions between military expenditure shares in the MENA region over the period 1979–2007. We explore whether there are latent common factors that impact on the military expenditures of 15 countries in the MENA region and whether these factors can be interpreted. Unobserved common factors induce cross‐sectional dependence and may lead to traditional panel‐time series estimators being inconsistent. To identify these latent factors we apply principal component analysis. We evaluate the interpretation of the estimated factors using the multiple‐indicator multiple‐cause model. We find that there is a substantial evidence of cross‐sectional dependence in the MENA region, induced mainly by two unobserved factors, but these factors are difficult to interpret.
Original languageEnglish
Pages (from-to)301-316
Number of pages16
JournalDEFENCE AND PEACE ECONOMICS
Volume21
Issue number4
DOIs
Publication statusPublished - 2010

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