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Multipliers of unexpected increases in defense spending: An empirical investigation

Nadav Ben Zeev () and Evi Pappa ()

Journal of Economic Dynamics and Control, 2015, vol. 57, issue C, 205-226

Abstract: We show that unexpected increases in defense spending increase total factor productivity (TFP) and output and decrease investment in US quarterly data. Yet, the output multiplier is zero when the TFP response is shut down. We examine various explanations for this phenomenon and find that the rise in TFP is due to the presence of measurement error in quarterly data. Using artificial data generated from an RBC model with measurement error, we demonstrate the suitability of our identification approach for recovering the true output multiplier in the presence of measurement error.

Keywords: Defense spending; Unanticipated defense shocks; Total factor productivity (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.jedc.2015.06.004

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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