Output Response to Government Spending: Evidence from New International Military Spending Data

32 Pages Posted: 19 Oct 2015

See all articles by Viacheslav Sheremirov

Viacheslav Sheremirov

Federal Reserve Banks - Federal Reserve Bank of Boston

Sandra Spirovska

Federal Reserve Banks - Federal Reserve Bank of Boston, Research Assistant

Date Written: 2015-07-01

Abstract

Using 25 years of military spending data from more than a hundred countries, this paper provides new evidence on the effect of government spending on output. Following a popular assumption that military spending is unlikely to respond to output at business-cycle frequencies — and exploiting variation in military spending of a significantly larger magnitude than in the previous literature based on U.S. data — we find that the pooled government spending multiplier is small: below 0.2. This estimate, however, masks substantial heterogeneity: the debt-financed spending multiplier is larger and can be well above 1 if monetary policy is accommodative. The multiplier is especially large in recessions and when the government purchases durables. We also document substantial heterogeneity across countries with the spending multiplier larger in advanced economies and in countries with a fixed exchange rate. The output response to government spending persists for about two to three years. These findings suggest that the effectiveness of fiscal policy depends largely on the economic environment, policy implementation, and the central bank’s response, and that the small multipliers found in historical or pooled data are a poor guide to evaluating the effectiveness of a specific stimulus program.

Keywords: fiscal multiplier, military spending

JEL Classification: E32, E43, E62, F44, H56

Suggested Citation

Sheremirov, Viacheslav and Spirovska, Sandra, Output Response to Government Spending: Evidence from New International Military Spending Data (2015-07-01). FRB of Boston Working Paper No. 15-9, Available at SSRN: https://ssrn.com/abstract=2675702

Viacheslav Sheremirov (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Sandra Spirovska

Federal Reserve Banks - Federal Reserve Bank of Boston, Research Assistant ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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