Citation

Discussion Paper Details

Please find the details for DP9948 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Chronicle of a War Foretold: The Macroeconomic Effects of Anticipated Defense Spending Shocks

Author(s): Nadav Ben Zeev and Evi Pappa

Publication Date: April 2014

Keyword(s): defense spending news, DSGE model, maximum forecast error variance and SVAR

Programme Area(s): International Macroeconomics

Abstract: 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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9948

Bibliographic Reference

Ben Zeev, N and Pappa, E. 2014. 'Chronicle of a War Foretold: The Macroeconomic Effects of Anticipated Defense Spending Shocks'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9948