Series: Working Papers. 2637.
Author: Mario Alloza, Rubén Domínguez-Díaz, Pau Durá and Iacopo Varotto
Spain
- Economic growth and convergence
- Fiscal policy
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Abstract
We estimate the macroeconomic effects of defence expenditure using a novel dataset covering the universe of defence procurement contracts in Spain over 30 years. Our defence procurement data overcomes identification challenges posed by implementation lags inherent in traditional government spending, as contracts are awarded years before production begins and spending is recorded in government national accounts only upon delivery. Using local projections, we find that GDP effects take time to materialise, become sizeable, but remain transitory. That is, while defence investment has relevant economic consequences, these are bound to occur in the medium run insofar as the spending process is hindered by implementation lags. A DSGE model calibrated to our empirical setting yields two main findings. First, reducing implementation lags to US levels would meaningfully frontload the macroeconomic effects. Second, defence spending delivers more transient and smaller long-run effects than general public investment projects.