The effects of military and non-military government expenditures on private consumption

Abstract

In this article, we provide evidence that civilian and military government spending have specific characteristics that can affect private consumption differently. Our vector autoregressive (VAR) estimates for the US economy for the period 1960-2013 show that civilian expenditure induces a positive and significant response on private consumption, whereas military spending has a negative impact. We also analyze the effects of these public spending components for the subsamples 1960-79 and 1983-2013, respectively. Our results show that the main transmission channels of both civilian and military expenditures have changed over time. We adopt a new Keynesian approach and develop a dynamic stochastic general equilibrium (DSGE) model in order to simulate the empirical evidence. Both the larger persistence of shocks in military spending and the different financing mechanisms, which account for the propensity of policymakers 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. In particular, we assess the impact of civilian and military shocks in the presence of different (i) shares of heterogeneous households, (ii) price rigidities, and (iii) monetary reactions in response to different government shocks.

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

“…Our DSGE model tries to explain the possible sources of crowding in/out effects in consumption observed in the data. To do so, we take into consideration heterogeneous households as in Galí et al (2007) and Lorusso and Pieroni (2017). A share of households does not have access to the bond market and consumes their current disposable income at each date.…”

Can public spending boost private consumption?

“…32 As a robustness exercise, we have also estimated an SVAR model in the spirit of Lorusso and Pieroni (2017). Qualitatively, the results of the SVAR confirm the main transmission mechanisms predicted by our DSGE model.…”

“…In this regard,Lorusso and Pieroni (2017) andBarro (1979) andBarro (1981) have stressed the importance of the economic effects of government spending and its alternative financing methods. In particular,Lorusso and Pieroni (2017) have focused on different public spending components, namely civilian and military expenditures.…”

Effect of military spending on private investment in Nigeria: does a crowding-out effect exist?

“…From the table, three empirical findings could be deduced irrespective of different estimation techniques deployed, country or countries studied as well as periods considered. The crowding-out effect of private investment by military spending, however, dominates the literature (Smith, 1980;Dreger, 1986;Knight, et al, 1996;Scott, 2001;Pieroni 2009;Hou and Chen, 2014;Malizard, 2015;Lorusso and Pieroni, 2017;Kennedy, 2021). This notwithstanding, a handful of studies concluded that military spending crowded-in investment (Üçler, 2016;Kollias and Paleologou, 2019).…”