Multipliers of unexpected increases in defense spending: an empirical investigation

We show that unexpected increases in defense spending increase total factor productivity (TFP) and output and decrease investment in US quarterly data. Yet, the output multiplier is zero when the TFP response is shut down. We examine various explanations for this phenomenon and find that the rise in TFP is due to the presence of measurement error in quarterly data. Using artificial data generated from an RBC model with measurement error, we demonstrate the suitability of our identification approach for recovering the true output multiplier in the presence of measurement error.Evi Pappa acknowledges the nancial support from the Spanish Ministry of Science and Innovation through grant ECO2012-32392, the Generalitat of Catalonia through grant SGR2009-00350., and the Barcelona Graduate School Research Network