Spending on the frontline: The macroeconomic implications of rising defence expenditure

Daragh Clancy and Matija Lozej
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Daragh Clancy: Central Bank of Ireland

No 03/RT/26, Research Technical Papers from Central Bank of Ireland

Abstract: European countries plan to boost their defence capabilities to deter external security threats. This implies a substantial change in the volume and composition of fiscal expenditure, as well as the structure of the industrial base. We analyse the macroeconomic implications of alternative policy choices to boost national security. We augment a global dynamic general equilibrium model to include a public good role for defence capabilities, a defence industry with R&D externalities, trade in military equipment, and public investment in dual-use goods. We show that rising security concerns can reduce all forms of economic activity. Enhancing defence capabilities mitigates this effect and boosts aggregate output (GDP) through increased defence industry production and government value added. However, this reorientation leads to a permanent crowding out of private consumption and a minimal effect on CPI inflation, unless the shock is temporary.

Keywords: Defence spending; Geoeconomics; Knowledge spillovers. (search for similar items in EconPapers)
JEL-codes: E62 F41 F52 H56 (search for similar items in EconPapers)
Date: 2026-03
New Economics Papers: this item is included in nep-dge and nep-mac
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