Bullets and Budgets: Measuring Defense Spending Multipliers

This paper examines the macroeconomic effects of defense spending shocks in emerging markets and developing economies (EMDEs), with a focus on Asia and the Pacific over 1990– 2023. Using large cyclically adjusted defense shocks identified through local projections, we find that defense spending generates modest but persistent positive output responses in EMDEs, while effects in advanced economies are weak or negative. Within EMDEs, multipliers are strongest in South Asia and weaker in East Asia, reflecting differences in labor intensity and capital intensity of procurement. Functional decompositions show that core military outlays and defense-related research and development drive the positive effects. State dependence is central: fiscal space, revenue capacity, financial development, institutional quality, and—critically— conflict exposure shape both the size and persistence of multipliers, with much stronger effects in high conflict environments. Regional spillovers are weak, short-lived, and turn negative at longer horizons. Extensive robustness checks confirm the stability of these findings.