Gernot Müller (Eberhard-Karls-University Tübingen and CEPR) - Big G

Co-authors: Lydia Cox (Harvard University), Ernesto Pasten (Central Bank of Chile and Toulouse School of Economics), Michael Weber (Booth School of Business, University of Chicago and NBER) and Raphael Schoenle (Brandeis University and CEPR)

“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 spending its composition is biased. Third, at the contract, firm and sectoral level moderate persistence characterizes spending. 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 and aligns the model predictions with the empirical evidence: Fiscal shocks hardly impact inflation, little crowding out of private expenditure occurs, markups can be either pro-cyclical or counter-cyclical, and the multiplier tends to be larger compared to a one-sector benchmark.

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