Alessandro Barattieri (ESG-UQAM of Montreal)

Estimating the Effects of Government Spending Through the Production Network

Abstract. We estimate the effects of government spending along the supply chain using disaggregated U.S. government procurement data. We first identify sectoral public spending shocks and combine them with input-output tables to measure upstream and downstream exposure through the network. We then estimate panel local projections and find that sector-specific government purchases have sizable effects both in industries that receive procurement contracts and across the supply chain. Employment increases significantly in recipient industries and in sectors supplying intermediate inputs to these industries, while employment decreases downstream. The response of prices and wages suggest higher intermediate-input demand by recipient industries translates into higher intermediate-input prices across the network, accounting for the crowding out of downstream employment. Using a granular instrumental variable approach, we then estimate the aggregate implications of sectoral shocks and the influence of sectoral heterogeneity. We find that aggregate effects are higher when recipient sectors are more downstream, have stickier prices, and when the government accounts for most of the recipient’s total sales.

Joint with M. Cacciatore and N. Traum.