Defence Spending and Economic Performance Under Sanctions: Some Sign Restricted VAR Evidence for Turkey

Abstract

Military sanctions have significant but complex effects on the economies they target, yet empirical research specifically addressing their macroeconomic implications remains sparse. Utilizing a sign-restricted Structural Vector Autoregression approach, the present paper investigates how military sanctions affect economic stability and defence expenditures in Turkey. The empirical findings indicate that sanctions induce temporary disruptions to economic output, unemployment, interest rates, and real exchange rates, while persistently elevating inflation. Notably, defence spending exhibits resilience, increasing rather than decreasing in response to sanctions, reflecting Turkey's strategic prioritization of defence capabilities. These results underline the necessity for robust monetary and fiscal policies, enhanced domestic defence industry capabilities, and proactive diplomacy to mitigate economic vulnerabilities. This study provides valuable insights for policymakers on managing sanctions' economic effects and highlights the strategic advantage Turkey holds due to its increasingly competitive defence exports.

JEL: F51, F52, C32