Investigating the Effects of Shocks Caused by Threats and Economic Sanctions on Iran's Military Spending

Iran's economy, on the one hand due to its location in a strategic region and also the imposition  of economic sanctions, is always dealing with various shocks that have gradually affected country's military expenditure. So, examining the effects of these threats and economic sanctions is of particular importance. Hence, the purpose of this study is to investigate the effects of shocks caused by threats and economic sanctions on the military expenditure of Iran using the BVAR model (for 1971-2019). The results show that shocks from fluctuations in oil prices, exchange rates, trade openness, military expenditure of other countries, terrorist threats and population, have a positive effect on military expenditure. But inflation shocks and tax revenues  in the early periods have had a negative effect on military expenditure. Nonetheless, in latter periods, tax incomes have had a positive effect on military spending. Yet, with the exception of exchange rate fluctuations and oil price shocks, the effects of other shocks disappear after 20 periods. Also, the similarity of the effect of the oil price shock with the GDP swings indicate that military expenditure is dependent on oil revenues. Moreover, the positive effect of other countries' military expenditures on Iran's military expending is indicative of an arms race between the countries of the region. Finally, it can be argued that although threats and economic sanctions have had an impact on the military spending, they have not been successful. Because, most of the sanctions not only have not reduced these expenditures but have also increased them.