Working Paper

Big G

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 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 exists, and the multiplier tends to be larger compared to a one-sector benchmark, aligning the model with the empirical evidence.

Keywords: Government Spending; Granularity; Sectoral Heterogeneity; Federal Procurement; Monetary Policy; Fiscal Policy Transmission;

JEL Classification: E32; E62;

https://doi.org/10.26509/frbc-wp-202015

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2020-05-27

Number: 20-15