CAUSALITY ANALYSIS BETWEEN GDP, DEFENCE EXPENDITURE AND THE NUMBER OF ARMED FORCES PERSONNEL: THE CASE OF CROATIA

Croatia’s national defence has experienced dramatic evolution since its creation, during the Homeland War in Croatia, at the beginning of the 1990s, and its subsequent transformation. Political and economic circumstances have the most significant impact on defence expenditure (DEFEXP) and the size of the armed forces. The aim of this research is to analyse a potential causality between DEFEXP and Croatia’s gross domestic product (GDP), as well as between DEFEXP and the number of Croatian Armed Forces personnel (AFP). The main data sources are from the World Bank and Stockholm International Peace Research Institute (SIPRI). The research is based on the use of the Granger causality test followed by procedures proposed by Toda and Yammamoto (1995) and the impulse response function with data from 1995 to 2014. The results show that there is no short-run or long-run causality between GDP and DEFEXP. The results obtained show one-way causality from DEFEXP to AFP, with AFP responding to shock from DEFEXP after three years.