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Are all the fiscal policy shocks identical? Analysing the effects on private consumption of civilian and military spending shocks

Luca Pieroni () and Marco Lorusso

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we show that civilian and military government spending have specific characteristics that can affect differently private consumption. Our VAR estimates for the US economy show that civilian expenditure induces a positive and significant response on private consumption whereas military spending has a negative impact. We adopt a new Keynesian approach and develop a DSGE model in order to simulate the empirical evidence. Both the larger persistence of shocks in military spending and the different financing mechanisms, which accounts for the propensity of policy-makers to use budget deficits to finance wars, mimic the differences in the empirical responses of private consumption. Simulated impulse response functions of alternative specification models prove the robustness of our analysis.

Keywords: Military and Civilian Spending; SVAR; DSGE Model. (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2015-12
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Working Paper: Are all the fiscal policy shocks identical? Analysing the effects on private consumption of civilian and military spending shocks (2015) Downloads
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