Working Paper: CEPR ID: DP17433
Authors: Juan Antolin-Diaz; Paolo Surico
Abstract: Military spending has sizable effects on long-run growth because it shifts the composition of public spending towards R&D. This boosts innovation and private investment in the medium-term, and increases productivity and output at longer horizons. Public R&D expenditure stimulates long-run growth even when it is not associated with war spending. In contrast, the effects of public investment are shorter-lived and the impact of public consumption is modest at most horizons. We reach these conclusions using Bayesian Vector Auto Regressions (BVAR) with up to sixty lags and 125 years of quarterly data for the United States, including newly reconstructed series of government spending broken down into its main categories since 1890.
Keywords: government; R&D; long-run; TFP; innovation; output; multiplier; inflation
JEL Codes: E31; E62; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Military spending (H56) | Public spending composition (towards R&D) (H54) |
| Public spending composition (towards R&D) (H54) | Innovation (O35) |
| Public spending composition (towards R&D) (H54) | Private investment (E22) |
| Innovation (O35) | Productivity (O49) |
| Private investment (E22) | Output (Y10) |
| Public R&D expenditure (H54) | Long-run growth (O49) |
| Defense spending shock (H56) | Total factor productivity (TFP) (O49) |
| Public R&D shock (O39) | Long-run output (E23) |
| Public R&D expenditure (H54) | Innovation (O35) |