Using Military Build-Ups to Capture Fiscal Shocks: A Reassessment
Ramey (2011a) and others argue that increases in government spending associated with wars and military build-ups constitute a good instrument for measuring the macroeconomic effects of fiscal shocks. We argue that this instrument has two important drawbacks: the composition of government spending during military build-ups in the US differs substantially from general government expenditure, and increases in military spending tend to crowd out federal non-defense spending as well as spending by state and local governments. These weaknesses help to explain why fiscal multipliers estimated with military build-ups tend to be smaller than those estimated using other approaches.
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