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The Macroeconomic Effects of Defence Expenditure: Evidence from Spain

Author

Listed:
  • Mario Alloza

    (Banco de España)

  • Rubén Domínguez-Díaz

    (Banco de España)

  • Pau Durá

    (Universitat de València)

  • Iacopo Varotto

    (Banco de España)

Abstract

We estimate the macroeconomic effects of defence expenditure using a novel dataset covering the universe of defence procurement contracts in Spain over 30 years. Our defence procurement data overcomes identification challenges posed by implementation lags inherent in traditional government spending, as contracts are awarded years before production begins and spending is recorded in government national accounts only upon delivery. Using local projections, we find that GDP effects take time to materialise, become sizeable, but remain transitory. That is, while defence investment has relevant economic consequences, these are bound to occur in the medium run insofar as the spending process is hindered by implementation lags. A DSGE model calibrated to our empirical setting yields two main findings. First, reducing implementation lags to US levels would meaningfully frontload the macroeconomic effects. Second, defence spending delivers more transient and smaller long-run effects than general public investment projects.

Suggested Citation

  • Mario Alloza & Rubén Domínguez-Díaz & Pau Durá & Iacopo Varotto, 2026. "The Macroeconomic Effects of Defence Expenditure: Evidence from Spain," Working Papers 2637, Banco de España.
    • Handle: RePEc:bde:wpaper:2637e
    DOI: https://doi.org/10.53479/44605
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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

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