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Spending on the frontline: The macroeconomic implications of rising defence expenditure

Author

Listed:
  • Clancy, Daragh

    (Central Bank of Ireland)

  • Lozej, Matija

    (Central Bank of Ireland)

Abstract

European countries plan to boost their defence capabilities to deter external security threats. This implies a substantial change in the volume and composition of fiscal expenditure, as well as the structure of the industrial base. We analyse the macroeconomic implications of alternative policy choices to boost national security. We augment a global dynamic general equilibrium model to include a public good role for defence capabilities, a defence industry with R&D externalities, trade in military equipment, and public investment in dual-use goods. We show that rising security concerns can reduce all forms of economic activity. Enhancing defence capabilities mitigates this effect and boosts aggregate output (GDP) through increased defence industry production and government value added. However, this reorientation leads to a permanent crowding out of private consumption and a minimal effect on CPI inflation, unless the shock is temporary.

Suggested Citation

  • Clancy, Daragh & Lozej, Matija, 2026. "Spending on the frontline: The macroeconomic implications of rising defence expenditure," Research Technical Papers 03/RT/26, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:03/rt/26
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    References listed on IDEAS

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F52 - International Economics - - International Relations, National Security, and International Political Economy - - - National Security; Economic Nationalism
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

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