Fiscal multipliers in advanced and developing countries: Evidence from military spending
Abstract
This paper provides new evidence on the effects of government spending on output from a large panel of advanced and developing countries. We identify government spending shocks using variation in international military spending. We estimate a one-year fiscal multiplier, pooled across all countries in the sample, in the vicinity of 0.8. The pooled cumulative multiplier reaches its peak at 0.86 two years after the shock. We find substantial heterogeneity across economic environments as well as across countries: The multipliers are relatively large (above one) in advanced economies, in recessions, for negative shocks, under a fixed exchange rate, and in closed economies. We also analyze scenarios in which the identifying restrictions may not hold, highlighting the possible limitations of the military-spending approach and providing a wider range of possible effects.