The effects of military and non-military government expenditures on private consumption

Lorusso, Marco and Pieroni, Luca (2017) The effects of military and non-military government expenditures on private consumption. Journal of Peace Research, 54 (3). pp. 442-456. ISSN 0022-3433

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Official URL: http://dx.doi.org/10.1177/0022343316687017

Abstract

In this article, we provide evidence that civilian and military government spending have specific characteristics that can affect private consumption differently. Our vector autoregressive (VAR) estimates for the US economy for the period 1960–2013 show that civilian expenditure induces a positive and significant response on private consumption, whereas military spending has a negative impact. We also analyze the effects of these public spending components for the subsamples 1960–79 and 1983–2013, respectively. Our results show that the main transmission channels of both civilian and military expenditures have changed over time. We adopt a new Keynesian approach and develop a dynamic stochastic general equilibrium (DSGE) model in order to simulate the empirical evidence. Both the larger persistence of shocks in military spending and the different financing mechanisms, which account for the propensity of policymakers 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. In particular, we assess the impact of civilian and military shocks in the presence of different (i) shares of heterogeneous households, (ii) price rigidities, and (iii) monetary reactions in response to different government shocks.

Item Type: Article
Uncontrolled Keywords: dynamic stochastic general equilibrium (DSGE) model, military and civilian spending, structural vector autoregressive (SVAR) model
Subjects: L100 Economics
Department: Faculties > Business and Law > Newcastle Business School > Accounting and Finance
Depositing User: Becky Skoyles
Date Deposited: 19 Jul 2018 09:27
Last Modified: 19 Jul 2018 15:00
URI: http://nrl.northumbria.ac.uk/id/eprint/35048

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