Disentangling Civilian and Military Spending Shocks: A Bayesian DSGE Approach for the US Economy

Lorusso, Marco and Pieroni, Luca (2019) Disentangling Civilian and Military Spending Shocks: A Bayesian DSGE Approach for the US Economy. Journal of Risk and Financial Management, 12 (3). p. 141. ISSN 1911-8074

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Official URL: https://doi.org/10.3390/jrfm12030141

Abstract

In this paper, we disentangle public spending components in order analyse their effects on the U.S. economy. Our Dynamic Stochastic General Equilibrium Model (DSGE) model includes both civilian and military expenditures. We take into account the changes in the effects of these public spending components before and after the structural break that occurred in the U.S. economy around 1980, namely financial liberalisation. Therefore, we estimate our model with Bayesian methods for two sample periods: 1954:3–1979:2 and 1983:1–2008:2. Our results suggest that total government spending has a positive effect on output, but it induces a fall in private consumption. Moreover, we find important differences between the effects of civilian and military spending. In the pre-1980 period, higher civilian spending induced a rise in private consumption, whereas military spending shocks systematically decreased it. Our findings indicate that civilian spending has a more positive impact on output than military expenditure. Our robustness analysis assesses the impact of public spending shocks under alternative monetary policy assumptions.

Item Type: Article
Uncontrolled Keywords: military and civilian spending; DSGE model; fiscal policy; monetary policy; Bayesian estimation
Subjects: N100 Business studies
N300 Finance
N400 Accounting
Department: Faculties > Business and Law > Newcastle Business School > Accounting and Finance
Depositing User: Elena Carlaw
Date Deposited: 03 Sep 2019 08:48
Last Modified: 11 Oct 2019 12:48
URI: http://nrl.northumbria.ac.uk/id/eprint/40482

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