The Military Multiplier

Ralph Luetticke, Müller, Gernot, Müller, Gernot and Anastasiia Antonova

No 20220, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: How effectively does defense spending translate into military capability? We introduce the military multiplier, defined as the percentage increase in military equipment generated by an additional dollar of defense spending. We show that the response of the relative price of defense goods to military buildups is a sufficient statistic for this multiplier: the stronger the price response, the smaller the multiplier. Time-series evidence for the United States shows that defense-sector prices rise sharply in response to military buildups in the post–Cold War period, implying a short-run multiplier of about 0.7, compared with values exceeding 1 during the Cold War. We develop and calibrate a multi-sector network model of the U.S. economy showing that this decline reflects high effective capital reallocation costs associated with the shrinking industrial base.

Keywords: Government spending; Effectiveness; Sectors; Reallocation (search for similar items in EconPapers)
JEL-codes: E23 E62 H56 O41 (search for similar items in EconPapers)
Date: 2025-05
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