A Reexamination of the Effec t of Rapid Military Spending on Infl ation

Abstract

The hypothesis that rapid defense buildups contribute to inflation recently has been rejected by Donald F. Vitaliano. In this paper, it is argued that this result is misleading, given that it is obtained under the implausible assumption of constancy of the expected real rate of interest. The hypothesis is reexamined using a well-known measure of the expected inflation rate, and it is found that growth of defense spending has a statistically significant positive effect on the rate of price inflation.

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