© 2015 Elsevier B.V. We show that unexpected increases in defense spending increase total factor productivity (TFP) and output and decrease investment in US quarterly data. Yet, the output multiplier is zero when the TFP response is shut down. We examine various explanations for this phenomenon and find that the rise in TFP is due to the presence of measurement error in quarterly data. Using artificial data generated from an RBC model with measurement error, we demonstrate the suitability of our identification approach for recovering the true output multiplier in the presence of measurement error.
- Defense spending
- Total factor productivity
- Unanticipated defense shocks
Ben Zeev, N., & Pappa, E. (2015). Multipliers of unexpected increases in defense spending: An empirical investigation. Journal of Economic Dynamics and Control, 57, 205-226. https://doi.org/10.1016/j.jedc.2015.06.004