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The Long-Run Effects of Government Spending

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  • Juan Antolin-Diaz
  • Paolo Surico

Abstract

Military spending has large and persistent effects on output because it shifts the composition of public spending toward R&D. This boosts innovation and private investment in the medium term and increases productivity and GDP at longer horizons. Public R&D expenditure stimulates economic activities beyond the business cycle even when it is not associated with war spending. In contrast, the effects of public investment are shorter-lived, while public consumption has a modest impact at most horizons. We reach these conclusions using BVAR with long lags and 125 years of US data, including newly reconstructed series of government spending by main categories since 1890.

Suggested Citation

  • Juan Antolin-Diaz & Paolo Surico, 2025. "The Long-Run Effects of Government Spending," American Economic Review, American Economic Association, vol. 115(7), pages 2376-2413, July.
    • Handle: RePEc:aea:aecrev:v:115:y:2025:i:7:p:2376-2413
    DOI: 10.1257/aer.20231278
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    1. Chow, Gregory C & Lin, An-loh, 1971. "Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 372-375, November.
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    1. Ying, Limeng & Bao, Mengqi & Yang, Jie, 2025. "Institutional trust as a catalyst: Government procurement and private firms’ risk-taking in China," Economic Analysis and Policy, Elsevier, vol. 87(C), pages 2437-2457.
    2. Burilkov, Alex & Bushnell, Katelyn & Mejino-López, Juan & Morgan, Thomas & Wolff, Guntram B., 2025. "Fit for war by 2030? European rearmament efforts vis-à-vis Russia," Kiel Reports 3, Kiel Institute for the World Economy.
    3. De Graeve, Ferre & Westermark, Andreas, 2025. "Long-lag VARs," Journal of Monetary Economics, Elsevier, vol. 156(C).
    4. Bowen Fu & Chenghan Hou & Jan Pruser, 2025. "Assessing the Effects of Monetary Shocks on Macroeconomic Stars: A SMUC-IV Framework," Papers 2510.05802, arXiv.org, revised Dec 2025.
    5. Haroutunian, Stephan & Nerlich, Carolin & Rodríguez-Vives, Marta & Schauhoff, Caspar, 2026. "Boosting efficiency in public investment in times of fiscal constraint," Economic Bulletin Articles, European Central Bank, vol. 2.
    6. Hie Joo Ahn & Yunjong Eo, 2025. "Hysteresis and the Role of Downward Nominal Wage Rigidity: Evidence from U.S. States," Finance and Economics Discussion Series 2025-062r1, Board of Governors of the Federal Reserve System (U.S.), revised 16 Dec 2025.
    7. Schularick, Moritz & Binder, Johannes, 2026. "Time to spend smart," Kiel Policy Briefs 204, Kiel Institute for the World Economy.
    8. Alexandr Burilkov & Katelyn Bushnell & Juan Majino-Lopez & Thomas Morgan & Guntram Wolff, 2025. "Bruegel-Kiel Report - Fit for War by 2030? European Rearmament Efforts vis-à-vis Russia," Working Papers ECARES 2025-10, ULB -- Universite Libre de Bruxelles.
    9. Alessandra Cepparulo & Luisa Giuriato & Paolo Pasimeni, 2025. "Defence Spending in the European Union: Evolution and Perspectives," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 67(4), pages 918-948, December.
    10. Lukas Vogel, 2025. "Reforms and Investments – The Benefits of Join Implementation," European Economy - Economic Briefs 084, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    11. Damiano Di Francesco & Omar Pietro Carnevale, 2025. "Are Hysteresis Effects Nonlinear?," LEM Papers Series 2025/32, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    12. Gazi Salah Uddin & Anh H. Le & Naoki Yago & John Beirne & Donghyun PARK, 2026. "Global Fragmentation, Fiscal Policy, and Economic Growth: A Cross-country Analysis," Working Papers wp62, South East Asian Central Banks (SEACEN) Research and Training Centre, revised Feb 2026.
    13. Lavinia Piemontese & Andrea Tulli, 2026. "Public Demand Allocation and Productivity of the Private Sector," Working Papers wp1218, Dipartimento Scienze Economiche, Universita' di Bologna.
    14. Fabio Franceschini, 2025. "The Innovation Long-Run Risk Component," Working Papers wp1215, Dipartimento Scienze Economiche, Universita' di Bologna.
    15. Giovanna Ciaffi & Matteo Deleidi & Mariana Mazzucato, 2026. "Directed Innovation Policies and the Supermultiplier: New Evidence," FMM Working Paper 122-2026, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    16. McClung, Nigel, 2025. "Why should fiscal imbalances concern policymakers at independent inflation-targeting central banks?," BoF Economics Review 4/2025, Bank of Finland.

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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