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Military spending has large and persistent effects on output because it shifts the composition of public spending towards 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 U.S. data, including newly reconstructed series of government spending by main categories since 1890.
