This thesis analyzes the long-run Crowding Out Effect of military expenditures on investment in Israel from 1948 to 2009. Changes in military spending are expected to affect the real interest rate and investment since the government has to borrow in order to finance the expenditure. Deficit spending has long-run consequences on economic growth and stability. Military expenditures took up 17.3% of government’s total expenditures and 7.3% of the nation’s Gross Domestic Product, GDP, in 2009. Israel offers a great case study of how the variations in military spending may affect private investment. It also provides a unique opportunity to investigate possibility of a Crowding Out Effect.