Can Government Demand Stimulate Private Investment? Evidence from U.S. Federal Procurement

March 10, 2016

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Format: Chicago

Shafik Hebous, and Tom Zimmermann. Can Government Demand Stimulate Private Investment? Evidence from U.S. Federal Procurement, (USA: International Monetary Fund, 2016) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We study the effects of federal purchases on firms’ investment using a novel panel dataset that combines federal procurement contracts in the United States with key financial firm-level information. We find that 1 dollar of federal spending increases firms’ capital investment by 7 to 11 cents. The average effect masks heterogeneity: Effects are stronger for firms that face financing constraints and they are close to 0 for unconstrained firms. In line with the financial accelerator model, our findings indicate that the effect of government purchases works through easing firms’ access to external borrowing. Furthermore, industry-level analysis suggests that that the increase in investment at the firm level translates into an industry-wide effect without crowding-out capital investment of other firms in the same industry.

Subject: Capital spending, Credit ratings, Currencies, Expenditure, Money, National accounts, Private investment

Keywords: Awarded firm-quarter contract, Book value, Capital investment, Capital spending, Constrained firm, Credit ratings, Currencies, External borrowing, Federal Procurement, Financing Constraints, Firm FE, Firm level, Firm size, Firm-quarter level, Investment, Investment response, Private investment, Spending Multipliers, Stock market information, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/060
Stock No:

WPIEA2016060
ISBN:

9781513578729
ISSN:

1018-5941

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