Abstract:
We estimate the effects of government spending along the supply chain using disaggregated U.S. government procurement data. First, we propose a new method to identify variation in sectoral public spending that is unanticipated and uncorrelated with macroeconomic outcomes, i.e., exogenous sectoral public spending shocks. We then use input-output tables to construct exogenous measures of upstream and downstream exposure to sectoral fiscal-policy shocks. Finally, we estimate panel local projections using the identified fiscal-policy shocks to study the dynamic response of employment, output, and prices within and across industries. We find that sector-specific government purchases have sizable effects in recipient industries (i.e., the industries that receive procurement contracts) and across the supply chain. Employment and output increase in recipient industries and sectors supplying intermediate inputs to the recipient industries. The positive effect is larger for industries that are more upstream in the network and when the government accounts for a larger share of recipient industries’ sectoral output. However, higher intermediate-input demand by recipient industries also translates into higher intermediate-input prices across the network, crowding out employment and output in more downstream industries. Overall, the effect of sectoral spending is positive at the aggregate level. These results have direct implications for modelling production networks for fiscal transmission.
Presenter: Matteo Cacciatore (HEC Montréal and Bank of Canada)
Title: “Estimating the Effects of Government Spending Through the Production Network”