NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Defense Government Spending Is Contractionary, Civilian Government Spending Is Expansionary

Roberto Perotti

NBER Working Paper No. 20179
Issued in May 2014
NBER Program(s):   EFG   PE

Impulse responses to government spending shocks in Standard Vector Autoregressions (SVARs) typically display "expansionary" features. However, SVARs can be subject to a "non-fundamentalness" problem. "Expectations - Augmented" VARs (EVARs), which use direct measures of forecasts of defense spending, typically display "contractionary" responses to a defense news shock. I show that, when properly specified, SVARs and EVARs give virtually identical results. The reason for the widespread, opposite view is that defense shocks have "contractionary" effects while civilian government spending shocks have "expansionary" effects. Existing EVARs and SVARs, however, include only total government spending. In addition, the former are typically estimated on samples that include WWII and the Korean war, when defense shocks prevailed, while the latter are estimated mostly on post-1953 samples, when civilian shocks prevailed.

download in pdf format
   (450 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20179

Users who downloaded this paper also downloaded* these:
Perotti w16786 The Effects of Tax Shocks on Output: Not So Large, But Not Small Either
Ball w20185 Long-Term Damage from the Great Recession in OECD Countries
Bilbiie, Monacelli, and Perotti w20687 Is Government Spending at the Zero Lower Bound Desirable?
Perotti w17571 The "Austerity Myth": Gain Without Pain?
Ramey w17787 Government Spending and Private Activity
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us