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Macroeconomic impacts of higher defence spending: a model-based assessment

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Listed:
  • Bokan, Nikola
  • Jacquinot, Pascal
  • Lalik, Magdalena
  • Müller, Georg
  • Priftis, Romanos
  • Rigato, Rodolfo

Abstract

This article uses a suite of macroeconomic models to assess the economic impacts of an increase in euro area defence spending. Multipliers of government purchases average just below 1, and there is notable model uncertainty. Pressures on HICP (Harmonised Index of Consumer Prices) inflation increase only gradually over time. An analysis of the transmission channels suggests that private sector expectations of higher future interest rates and taxes may substantially reduce fiscal multipliers. As regards the distributional consequences of increased spending, we find mild cross-country spillovers and markedly different effects on consumption across the wealth distribution. JEL Classification: E32, E62

Suggested Citation

  • Bokan, Nikola & Jacquinot, Pascal & Lalik, Magdalena & Müller, Georg & Priftis, Romanos & Rigato, Rodolfo, 2025. "Macroeconomic impacts of higher defence spending: a model-based assessment," Economic Bulletin Articles, European Central Bank, vol. 6.
    • Handle: RePEc:ecb:ecbart:2025:0006:
    Note: 2613775
    as

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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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