The Long-Run Effects of Government Spending

Juan Antolin-Diaz and Paolo Surico

American Economic Review, 2025, vol. 115, issue 7, 2376-2413

Abstract: Military spending has large and persistent effects on output because it shifts the composition of public spending toward R&D. This boosts innovation and private investment in the medium term and increases productivity and GDP at longer horizons. Public R&D expenditure stimulates economic activities beyond the business cycle even when it is not associated with war spending. In contrast, the effects of public investment are shorter-lived, while public consumption has a modest impact at most horizons. We reach these conclusions using BVAR with long lags and 125 years of US data, including newly reconstructed series of government spending by main categories since 1890.

JEL-codes: E21 E22 E23 E62 H50 H56 O30 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1257/aer.20231278

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