Paper Big G

“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 are very volatile and account for the largest part of the short-run variation in total government spending, G. 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 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.

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