Changes in government spending often lead to significant shifts in demand across sectors.
This paper analyzes the effects of sector-specific changes in government spending in a two-
sector dynamic general equilibrium model in which the reallocation of capital across sectors
is costly. The two-sector model leads to a richer array of possible responses of aggregate
variables than the one-sector model. The empirical part of the paper estimates the effects of
military buildups on a variety of macroeconomic variables using a new measure of military …