The Offensive Power of Defense News in Europe

Nadav Ben Zeev, Evi Pappa and Elena Scola Gagliardi

No 20637, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We estimate a Bayesian panel SVAR on annual data for 17 European economies over five decades. Defense news shocks are identified by maximizing the forecast error variance of military spending over five years, subject to orthogonality to contemporaneous expenditure. Extending medium-run restrictions to a panel VAR, we show these shocks systematically raise consumption, investment, employment, and output, with multipliers above unity, but also raise income inequality. Gains are primarily supply-driven operating through higher R&D spending and sustained TFP growth. Effects are larger in Europe than in the U.S., especially post-EMU, and more persistent in NATO members and high-debt economies.

Keywords: TFP (search for similar items in EconPapers)
JEL-codes: E62 E65 H30 (search for similar items in EconPapers)
Date: 2025-09
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