Disentangling Civilian and Military Spending Shocks: A Bayesian DSGE Approach for the US Economy

Abstract

In this paper, we disentangle public spending components in order analyse their effects on the U.S. economy. Our Dynamic Stochastic General Equilibrium Model (DSGE) model includes both civilian and military expenditures. We take into account the changes in the effects of these public spending components before and after the structural break that occurred in the U.S. economy around 1980, namely financial liberalisation. Therefore, we estimate our model with Bayesian methods for two sample periods: 1954:3-1979:2 and 1983:1-2008:2. Our results suggest that total government spending has a positive effect on output, but it induces a fall in private consumption. Moreover, we find important differences between the effects of civilian and military spending. In the pre-1980 period, higher civilian spending induced a rise in private consumption, whereas military spending shocks systematically decreased it. Our findings indicate that civilian spending has a more positive impact on output than military expenditure. Our robustness analysis assesses the impact of public spending shocks under alternative monetary policy assumptions.

Towards an effective fiscal stimulus: Evidence from Botswana

“…The increase in spending government consumption also crowds out the private sector activities in the short run. These results are consistent with classical economic theories and findings from Mountford and Uhlig (2009) as well as Lorusso and Pieroni (2019). The real exchange rate depreciates after a one period lag and causes the prices of traded goods to be expensive, therefore reducing the traded output after a year and, in turn, dragging up real GDP.…”