My thesis is in English

The aim of my thesis is to analyze whether the government defence expenditure, as a component of total public spending, is able to affect the economic performance of U.S., and/or account for the potential role in explaining fiscal policy fluctuations. Broadly speaking, my work aims to answer to the following question: does military spending provide economic stimulation through higher aggregate demand for goods and services, or does military spending retard economic performance because it draws resources from more productive activities that can be devolved to the civilian sector? The thesis is composed by three chapters which capture different aspects about these arguments. The first chapter empirically assesses the so called "Military Keynesianism", i.e. the approach that treats the military budget as a source of aggregate demand for goods and services and, therefore, a source of economic stimulation. The military Keynesianism took centre stage in the policy debate with John Maynard Keynes, who argued that in extreme situations the government should spend on anything as a means of stimulating aggregate demand. Thus, the aim of this chapter is to empirically test the Keynesian hypothesis, by using a long-run equilibrium model for the U.S. economy. My contribution, with respect to previous works, is twofold. First, inferences are adjusted for structural breaks exhibited by the data concerning fiscal and monetary variables. Second, I show that the results are sensitive to sub sample choices. In the second chapter, my goal is to disentangle the components of government spending in civilian and military expenditures into a standard DSGE new-Keynesian model and analyze their role on the U.S. economy, with particular attention on private consumption and wages. In particular, I focus on the changes in the effects of public spending components before and after a structural break that occurred in U.S. economy around 1980. I assume that this break is related to a change in consumer behaviour, i.e. the increased asset market participation. From a theoretical point of view, I assume a standard Dynamic Stochastic General Equilibrium Model (DSGE) with an economy with sticky prices and limited asset market participation. Moreover, I assume the existence of a fiscal policy authority that purchases consumption goods (divided in spending for military and non-military sectors), raises (lump-sum and income) taxes and issues nominal debt. Finally, I include a monetary authority, which sets its policy instrument, the nominal interest rate. I estimate the theoretical model with a Bayesian approach, the so called “strong econometric approach”, which allows providing a full characterization of the data generating process and a proper testing specification. The latter aspect is particularly important for the fiscal shocks assessment. In the last chapter, I focus on government spending multiplier and, in particular, on the effects of different components of public spending on the U.S. economy. I disaggregate total government spending into civilian and military expenditures and estimate, through a structural VAR approach, their effects separately on GDP and private consumption. In this chapter, I introduce three main novelties with respect to previous literature. First, I analyze the effects of public spending on the economy accounting for "within" complementarity/substitutability of military and non-military expenditures. Second, I show that the financing mechanism of the different spending components is crucial for agent’s decision about consumption. Finally, I assess that crowding in/out effects of government spending components on aggregate consumption are related to the existence of a precise portion of public expenditure that stimulates/depresses a fraction of consumers. In this chapter, I also develop a simple DSGE new-Keynesian model that can potentially account for that evidence. My framework shares many ingredients with recent dynamic optimizing sticky price models, though I improve on the assumption of the fiscal sector by introducing non-military and military spending components. This allows me to show that my empirical results can be reproduced by the theoretical model by comparing empirical and simulated impulse response functions.

Keynesian and new-Keynesian models: the impact of military spending on the United States economy

LORUSSO, Marco
2011-01-01

Abstract

The aim of my thesis is to analyze whether the government defence expenditure, as a component of total public spending, is able to affect the economic performance of U.S., and/or account for the potential role in explaining fiscal policy fluctuations. Broadly speaking, my work aims to answer to the following question: does military spending provide economic stimulation through higher aggregate demand for goods and services, or does military spending retard economic performance because it draws resources from more productive activities that can be devolved to the civilian sector? The thesis is composed by three chapters which capture different aspects about these arguments. The first chapter empirically assesses the so called "Military Keynesianism", i.e. the approach that treats the military budget as a source of aggregate demand for goods and services and, therefore, a source of economic stimulation. The military Keynesianism took centre stage in the policy debate with John Maynard Keynes, who argued that in extreme situations the government should spend on anything as a means of stimulating aggregate demand. Thus, the aim of this chapter is to empirically test the Keynesian hypothesis, by using a long-run equilibrium model for the U.S. economy. My contribution, with respect to previous works, is twofold. First, inferences are adjusted for structural breaks exhibited by the data concerning fiscal and monetary variables. Second, I show that the results are sensitive to sub sample choices. In the second chapter, my goal is to disentangle the components of government spending in civilian and military expenditures into a standard DSGE new-Keynesian model and analyze their role on the U.S. economy, with particular attention on private consumption and wages. In particular, I focus on the changes in the effects of public spending components before and after a structural break that occurred in U.S. economy around 1980. I assume that this break is related to a change in consumer behaviour, i.e. the increased asset market participation. From a theoretical point of view, I assume a standard Dynamic Stochastic General Equilibrium Model (DSGE) with an economy with sticky prices and limited asset market participation. Moreover, I assume the existence of a fiscal policy authority that purchases consumption goods (divided in spending for military and non-military sectors), raises (lump-sum and income) taxes and issues nominal debt. Finally, I include a monetary authority, which sets its policy instrument, the nominal interest rate. I estimate the theoretical model with a Bayesian approach, the so called “strong econometric approach”, which allows providing a full characterization of the data generating process and a proper testing specification. The latter aspect is particularly important for the fiscal shocks assessment. In the last chapter, I focus on government spending multiplier and, in particular, on the effects of different components of public spending on the U.S. economy. I disaggregate total government spending into civilian and military expenditures and estimate, through a structural VAR approach, their effects separately on GDP and private consumption. In this chapter, I introduce three main novelties with respect to previous literature. First, I analyze the effects of public spending on the economy accounting for "within" complementarity/substitutability of military and non-military expenditures. Second, I show that the financing mechanism of the different spending components is crucial for agent’s decision about consumption. Finally, I assess that crowding in/out effects of government spending components on aggregate consumption are related to the existence of a precise portion of public expenditure that stimulates/depresses a fraction of consumers. In this chapter, I also develop a simple DSGE new-Keynesian model that can potentially account for that evidence. My framework shares many ingredients with recent dynamic optimizing sticky price models, though I improve on the assumption of the fiscal sector by introducing non-military and military spending components. This allows me to show that my empirical results can be reproduced by the theoretical model by comparing empirical and simulated impulse response functions.
2011
Military spending; Output; Long-run Models; Civilian Spending; Asset Market Participation; Fiscal policy; Bayesian Estimates; Government Spending Multiplier; Structural Vector Autoregressive Analysis; Dynamic Stochastic General Equilibrium Model
My thesis is in English
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11562/351819
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