This paper empirically tests the Keynesian hypothesis that government defence spending positively impacts on aggregate output, by using a long-run equilibrium model for the US and the UK.Our contribution, with respect to previous works, is twofold. First, our inferences are adjusted for structural breaks exhibited by the data concerning fiscal and monetary variables. Second, we take into account different dynamics between defence spending on aggregate output, showing that the results are sensitive to sub-sample choices. Though the estimated elasticities in both countries show a lack of significance in the more recent years of the sample, defence-spending priorities addressed to international security may revitalize pro-cyclical effects in the UK, by an industrial policy of defence shared with the EU members. (C) 2008 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.
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