The Long-Run Effects of Government Spending
Juan Antolin-Diaz, Paolo Surico
American Economic Review · 2025 · Volume 115 · Issue 7
Abstract
Military spending has large and persistent effects on output because it shifts the composition of public spending toward R&D. This boosts innovation and private investment in the medium term and increases productivity and GDP at longer horizons. Public R&D expenditure stimulates economic activities beyond the business cycle even when it is not associated with war spending. In contrast, the effects of public investment are shorter-lived, while public consumption has a modest impact at most horizons. We reach these conclusions using BVAR with long lags and 125 years of US data, including newly reconstructed series of government spending by main categories since 1890.
Keywords
Macroeconomics: Consumption, Saving, Wealth, Investment, Capital, Intangible Capital, Capacity, Macroeconomics: Production, Fiscal Policy, National Government Expenditures and Related Policies: General, National Security and War, Innovation, Research and Development, Technological Change, Intellectual Property Rights: General
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