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Multipliers of unexpected increases in defense spending: An empirical investigation

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  • Ben Zeev, Nadav
  • Pappa, Evi

Abstract

We show that unexpected increases in defense spending increase total factor productivity (TFP) and output and decrease investment in US quarterly data. Yet, the output multiplier is zero when the TFP response is shut down. We examine various explanations for this phenomenon and find that the rise in TFP is due to the presence of measurement error in quarterly data. Using artificial data generated from an RBC model with measurement error, we demonstrate the suitability of our identification approach for recovering the true output multiplier in the presence of measurement error.

Suggested Citation

  • Ben Zeev, Nadav & Pappa, Evi, 2015. "Multipliers of unexpected increases in defense spending: An empirical investigation," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 205-226.
  • Handle: RePEc:eee:dyncon:v:57:y:2015:i:c:p:205-226
    DOI: 10.1016/j.jedc.2015.06.004
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    References listed on IDEAS

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    More about this item

    Keywords

    Defense spending; Unanticipated defense shocks; Total factor productivity;

    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

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