The Macroeconomic Effects of Military Buildups in a New Neoclassical Synthesis Framework

The authors study the macroeconomic consequences of large military buildups using a New Neoclassical Synthesis (NNS) approach that combines nominal rigidities within imperfectly competitive goods and labour markets. They show that the predictions of the NNS framework generally are consistent with the sign, timing, and magnitude of how hours worked, after-tax real wages, and output actually respond to an upsurge in military purchases. The key factors leading to these findings are: (i) variations in the ratio of price to marginal cost resulting from nominal-price inflexibilities, (ii) staggered nominal-wage setting, and (iii) time-varying marginal tax rates. Unlike the standard neoclassical model, the NNS framework successfully explains the macroeconomic effects of military buildups when taxes are distortionary.