Iranian government budget on military over the last decade has been higher than the average of the world. The current increasing international sanctions aim to reduce the military capabilities and capacities of the Iranian government. In this study, we analyze the response of the Iranian economy to shocks in its military budget from 1959-2007, using Impulse Response Functions (IRF) and Variance Decomposition Analysis (VDA) techniques. The Granger causality results show that there is unidirectional causality from military spending to the economic growth. The response of income growth to increasing shocks in the military budget is positive and statistically significant.