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The Military Multiplier

Author

Listed:
  • Luetticke, Ralph
  • Müller, Gernot
  • Müller, Gernot
  • Antonova, Anastasiia

Abstract

How effectively does defense spending translate into military capability? We introduce the military multiplier, defined as the percentage increase in military equipment generated by an additional dollar of defense spending. We show that the response of the relative price of defense goods to military buildups is a sufficient statistic for this multiplier: the stronger the price response, the smaller the multiplier. Time-series evidence for the United States shows that defense-sector prices rise sharply in response to military buildups in the post–Cold War period, implying a short-run multiplier of about 0.7, compared with values exceeding 1 during the Cold War. We develop and calibrate a multi-sector network model of the U.S. economy showing that this decline reflects high effective capital reallocation costs associated with the shrinking industrial base.

Suggested Citation

  • Luetticke, Ralph & Müller, Gernot & Müller, Gernot & Antonova, Anastasiia, 2025. "The Military Multiplier," CEPR Discussion Papers 20220, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20220
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    File URL: https://cepr.org/publications/DP20220
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    Keywords

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    JEL classification:

    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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