DEFENSE SPENDING AND AGGREGATE OUTPUT IN THE UNITED STATES

Abstract

In this article the effect of defense spending on aggregate output is discussed. Recent publications in this area are reviewed and new additional evidence is provided. The findings presented in this paper are supportive of the positive effect of defense spending. However, in light of the contrary evidence presented in other papers, empirical evidence taken as a whole, suggests that a definitive conclusion about the effect of defense spending at this time should be avoided.

Keywords:

• Defense spending
• Aggregate output
• Interest‐rate augmented keynesian cross‐model
• Cointegration
• New evidence

Notes

¹ There is a large literature concerning the effects of defense spending. The papers discussed below are those for the United States, and are fairly representative of recent literature for the United States. The discussion of the literature below is not meant to provide an exhaustive survey and some relevant papers may have been omitted. I would like to thank the editors of this journal for their helpful comments.

² There are several empirical applications of this model and extensions of it for assessing the impact of defense spending in the United States. For example, those by Atesoglu and Mueller (1990) and Mueller and Atesoglu (1993) indicate a positive effect of defense spending in the United States on growth. However, applications by Huang and Mintz (1990) and Ward and Davis (1992) report no effect and a negative effect of defense spending on growth, respectively.

³ An expanded version of the interest‐rate augmented Keynesian model was used by Atesoglu (2004) to examine the effect of defense spending on investment in the United States. His findings, obtained by employing the cointegration method, indicated a significant and a positive cointegration relation between defense spending and investment.

⁴ The source of data used is FRED (6/22/07), Federal Reserve Bank of St. Louis. Empirical measures used are: aggregate real output = real Gross Domestic Product (Seasonally Adjusted Annual Rate); real defense spending = National Defense Consumption Expenditures & Gross Investment (Seasonally Adjusted Annual Rate) deflated by Gross Domestic Product: Chain‐type Price Index (Seasonally Adjusted); real non‐defense government spending = real Government Consumption Expenditures & Gross Investment (Seasonally Adjusted Annual Rate) minus real defense spending; the real interest rate = Moody’s Seasoned Aaa Corporate Bond Yield less the rate of change in Gross Domestic Product: Chain‐type Price Index (Seasonally Adjusted), the rate of change in current quarter is calculated relative to the corresponding quarter in the previous year.

⁵ All estimations in this paper were made with EViews (sv 4.1).