December 13, 2016, 17:00–18:30
Room MS 003
In this paper, we estimate the effect of defense spending on the U.S. macroeconomy since World War II. First, we construct a new panel dataset of state-level federal defense contracts. Second, we sum observations across states and, using the resulting time series, estimate the aggregate effect of defense spending on national income and employment via instrumental variables. Third, we estimate local multipliers using the state-level data, which measures the relative effect on economic activity due to relative differences in defense spending across states. Comparing the aggregate and local multiplier estimates, we find that the two deliver similar results, providing a case in which local multiplier estimates may be reliable indicators of the aggregate effects of fiscal policy. Next, we use the panel aspect of the data to dramatically increase the precision of estimates of the aggregate multiplier (relative to using the aggregate data alone). Across a wide range of specifications, we estimate income and employment multipliers between zero and 0.5. The paper is co-authored with Rodrigo Guerrero.