Date: 2014
Type: Working Paper
Chronicle of a war foretold : the macroeconomic effects of anticipated defense spending shocks
Working Paper, CEPR Discussion Paper, 2014/9948
BEN ZEEV, Nadav, PAPPA, Evi, Chronicle of a war foretold : the macroeconomic effects of anticipated defense spending shocks, CEPR Discussion Paper, 2014/9948 - https://hdl.handle.net/1814/34316
Retrieved from Cadmus, EUI Research Repository
We identify US defense news shocks as shocks that best explain future movements in defense spending over a five-year horizon and are orthogonal to current defense spending. Our identified shocks are strongly correlated with the Ramey (2011) news shocks, but explain a larger share of macroeconomic fluctuations and have significant demand effects. Fiscal news induces significant and persistent increases in output, consumption, investment, hours and the interest rate. Standard DSGE models fail to produce such a pattern. We propose a sticky price model with distortionary taxation, variable capital utilization, capital adjustment costs and rule-of-thumb consumers that replicates the empirical findings.
Cadmus permanent link: https://hdl.handle.net/1814/34316
ISSN: 1725-6704
Series/Number: CEPR Discussion Paper; 2014/9948
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