MILITARY SPENDING AND INTEREST-RATES

This paper examines a number of hypotheses about the determination of interest rates for the United States. In particular, we are most interested in the relative interest rate effects of changes in military and non-military spending. We find that increases in military spending cause a significantly larger increase in interest rates than do increases in non-military spending. These results are insensitive to alternative measures of the data, specifications of the interest rate equations and estimation procedures. Cuts in military spending can reduce the level of total government spending or can be transferred to other programs. Our results then suggest that the crowding out of private expenditures can be reduced when government shifts resources from military to non-military spending.