Big G

99 Pages Posted: 10 Apr 2020 Last revised: 7 Sep 2022

See all articles by Lydia Cox

Lydia Cox

Harvard University, Department of Economics

Gernot J. Müller

University of Tuebingen - Department of Economics

Ernesto Pasten

University of Toulouse 1 - Toulouse School of Economics (TSE)

Raphael Schoenle

Brandeis University

Michael Weber

University of Chicago - Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 5 versions of this paper

Date Written: September 7, 2022

Abstract

“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

Cox, Lydia and Müller, Gernot J. and Pasten, Ernesto and Schoenle, Raphael and Weber, Michael, Big G (September 7, 2022). Chicago Booth Research Paper No. 20-04, Fama-Miller Working Paper, University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-36, Available at SSRN: https://ssrn.com/abstract=3571449 or http://dx.doi.org/10.2139/ssrn.3571449

Lydia Cox

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

Ernesto Pasten

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Raphael Schoenle

Brandeis University ( email )

Waltham, MA 02454
United States

Michael Weber (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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