Working Paper: CEPR ID: DP14625
Authors: Lydia Cox; Gernot Müller; Ernesto Pasten; Raphael Schoenle; Michael Weber
Abstract: ``Big G'' typically refers to aggregate government spending on a homogeneous good. In this paper, we open up this construct by analyzing the entire universe of procurement contracts of the US government and establish five facts. First, government spending is granular, that is, it is concentrated in relatively few firms and sectors. Second, relative to private expenditures its composition is biased. Third, procurement contracts are short-lived. Fourth, idiosyncratic variation dominates the fluctuation of spending. Last, government spending is concentrated in sectors with relatively sticky prices. Accounting for these facts within a stylized New Keynesian model offers new insights into the fiscal transmission mechanism: fiscal shocks hardly impact inflation, little crowding out of private expenditure exists, and the multiplier tends to be larger compared to a one-sector benchmark aligning the model with the empirical evidence.
Keywords: government spending; federal procurement; granularity; sectoral heterogeneity; fiscal policy; transmission; monetary policy
JEL Codes: E62; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government spending characteristics (granularity) (H70) | significant fluctuations in government spending (E62) |
| granularity of government spending (H70) | idiosyncratic shocks (D89) |
| sectoral bias in government spending (H50) | varied effects across sectors (L52) |
| short duration of government contracts (H57) | frequent modifications (C69) |
| frequent modifications (C69) | idiosyncratic nature of government spending fluctuations (H59) |
| idiosyncratic shocks (D89) | fluctuations in government spending (E62) |
| government spending concentrated in sectors with high price stickiness (E62) | inflationary response to fiscal shocks (E62) |
| government spending characteristics (like granularity, sectoral bias) (H50) | fiscal policy outcomes (inflation, crowding out of private expenditure) (E62) |
| fiscal shocks (E62) | minimal impact on inflation (E31) |
| multiplier effect of government spending (E62) | larger than traditional one-sector models (O41) |