99 Pages Posted: 10 Apr 2020 Last revised: 7 Sep 2022
Date Written: September 7, 2022
“Big G” typically refers to aggregate government spending on a homogeneous good, often understood as a single policy instrument that can be adjusted to fine-tune the business cycle. We confront this notion with five facts—established for the universe of U.S. federal purchases. First, federal purchases account for the largest part of the short-run variation in G, including variation due to identified fiscal shocks. Second, the origin of their variation is granular. Third, purchases are subject to procurement and bidding. Fourth, federal spending is concentrated in long-term contracts. Fifth, the composition of federal purchases is biased towards specific sectors, in which private-sector prices are sticky. We develop a stylized two-sector extension of the New Keynesian model consistent with these five facts and find the origin of shocks to government purchases is key for their aggregate effects, consistent with VAR evidence.
Keywords: Government spending, federal procurement, granularity, sectoral heterogeneity, fiscal policy transmission, monetary policy
JEL Classification: E62, E32
Suggested Citation: Suggested Citation