Are all the fiscal policy shocks identical? Analysing the effects on private consumption of civilian and military spending shocks

In this paper, we show that civilian and military government spending have specific characteristics that can affect differently private consumption. Our VAR estimates for the US economy show that civilian expenditure induces a positive and significant response on private consumption whereas military spending has a negative impact. We adopt a new Keynesian approach and develop a DSGE model in order to simulate the empirical evidence. Both the larger persistence of shocks in military spending and the different financing mechanisms, which accounts for the propensity of policy-makers to use budget deficits to finance wars, mimic the differences in the empirical responses of private consumption. Simulated impulse response functions of alternative specification models prove the robustness of our analysis.