Working Paper: NBER ID: w27034
Authors: Lydia Cox; Gernot Müller; Ernesto Pastén; 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; fiscal policy; New Keynesian model; sectoral bias; granularity
JEL Codes: E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government spending is granular (H59) | economic dynamics (P42) |
| Granularity of government spending (H59) | fiscal policy effectiveness (E62) |
| Idiosyncratic shocks (D89) | fluctuations in government spending (E62) |
| Government spending concentration in sticky price sectors (H59) | inflationary response to fiscal shocks (E62) |
| Government spending bias relative to private expenditures (H50) | fiscal transmission mechanism (F42) |
| Short-lived government contracts (D86) | stability and predictability of government spending (E62) |
| Granularity of government spending (H59) | government spending dynamics (E62) |
| Idiosyncratic shocks (D89) | aggregate variation in government spending (H59) |
| Government consumption concentration in sticky price sectors (E20) | fiscal multiplier (E62) |