Multipliers of unexpected increases in military spending : an empirical investigation

Abstract

We show that unexpected increases in defense and total government 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 _nd that the rise in TFP is due to the presence of measurement error in quarterly data. Anticipated increases in military spending are not a_ected by the presence of measurement error and induce sizeable multipliers.