96 Pages Posted: 10 Apr 2020 Last revised: 4 Jan 2021
Date Written: April 30, 2020
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 U.S. federal 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, contracts and firms are short-lived in the dataset and sectoral spending is only moderately persistent. Fourth, idiosyncratic variation dominates fluctuations in 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 occurs, markups can be both pro-cyclical or counter-cyclical depending on the source of the shock, 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 Classification: E62, E32
Suggested Citation: Suggested Citation