We revisit the effect of government spending on corporate investment. Employing a narrative approach to identify exogenous variation in government expenditures (Ramey, 2011; Ramey and Zubairy, 2018), we find that a one-percentage-point increase in military spending news, as a share of GDP, raises capital expenditures of publicly listed US firms by more than one percent over five years. The investment response is not driven by contractors with the Department of Defense, financial constraints, unconventional monetary policy, or geopolitical and economic uncertainty. Instead, we show that news about military spending lowers long-term nominal and ex-ante real interest rates on impact, with effects persisting for up to five years after the shock. Lower interest rates translate into declines in the firm-level cost of capital, particularly the cost of debt. Consistent with the decline in the cost of capital, firms expand debt holdings and investment.
Comissão Organizadora
Comissão Científica
Ferramenta completa de submissão, avaliação e publicação de anais para eventos científicos.
