This paper examines the macroeconomic effects of defense spending shocks in emerging markets and developing economies (EMDEs), with a focus on the Asia-Pacific over 1990-2023. Using large cyclically adjusted defense shocks identified through local projections, we find that defense spending generates modest but persistent positive output responses in EMDEs, while effects in advanced economies are weak or negative. Within EMDEs, multipliers are strongest in South Asia and weaker in East Asia, reflecting differences in the labor and capital intensity of procurement. Functional decompositions indicate that core military outlays and, to a lesser extent, defense-related R&D drive the positive effects. State dependence is central: fiscal space, revenue capacity, financial development, institutional quality, and – critically – conflict exposure shape both the size and persistence of multipliers, with substantially larger effects in high-conflict environments. Regional spillovers are weak, short-lived, and turn negative at longer horizons. Evidence on transmission channels points to limited investment responses and some external leakage, consistent with demand-driven effects rather than sustained productivity gains. Importantly, additional results show no strong evidence of intra-budget crowding-out: non-defense expenditure tends to rise following defense shocks, suggesting fiscal accommodation rather than reallocation within the budget.
Jalles et al. (Mon,) studied this question.