The economic effects of military expenditure: A macrosimulation analysis for Italy

Marco Stamegna, D’Alessandro, Simone, Till Heydenreich and Guilherme Morlin

MPRA Paper from University Library of Munich, Germany

Abstract: This paper uses the Eurogreen+ macrosimulation model to assess the macroeconomic effects of the increase in Italy’s military expenditure needed to meet the NATO target for core defence requirements adopted in 2025. Eurogreen+ is a stock-flow consistent model of the Italian economy, grounded in post-Keynesian theory and featuring a dynamic input-output structure (Cano Ortiz et al., 2026). The analysis simulates the effects of a 1.5-percentage-point increase in military expenditure over a five-year horizon under alternative fiscal and monetary policy stances. The results indicate that a deficit-financed increase in military expenditure raises GDP and employment while lowering the debt-to-GDP ratio, but at the cost of a significant deterioration in the trade balance. By contrast, when the increase in military expenditure is financed through proportional cuts to other components of public expenditure, the effects become strongly contractionary, reducing GDP and employment, increasing the debt-to-GDP ratio, and crowding out social expenditure. These findings suggest that military expenditure exhibits a lower fiscal multiplier than the civilian expenditures it displaces. Finally, a more accommodative monetary policy partly offsets the adverse effects on the debt-to-GDP ratio but leaves the negative effects on GDP, employment, social expenditure, and the trade balance largely unchanged.

Keywords: Military expenditure; fiscal multipliers; input-output; dynamic macrosimulation (search for similar items in EconPapers)
JEL-codes: E17 E62 H50 H56 (search for similar items in EconPapers)
Date: 2026-09
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