Macroeconomic Effects of Government Defense and Non-Defense R&D

We use narrative R&D appropriation shocks to investigate the transmission mechanism of government R&D. We document that a non-defense R&D shock boosts innovation, the stock market and labor productivity while prices decrease. We show that NASA's R&D contracting during the Space Race contributes to our results, with effects concentrated in transportation, electrical and computer equipment, and even more persistent in business services. In contrast, a defense R&D shock leads to mixed effects on innovation and labor productivity and, as a military news shock, generates a hump-shaped increase in defense equipment sector production. These results are robust in the post-Korea sample. Our findings on the macroeconomic transmission mechanism of non-defense R&D are consistent with theoretical models with endogenous productivity mechanisms and learning by doing.