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Can Government Demand Stimulate Private Investment? Evidence from U.S. Federal Procurement
Author:
Mr. Shafik Hebous
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and
Tom Zimmermannnull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2016: Issue 060
Language:
English
Publication Date:
10 Mar 2016
DOI:
https://doi.org/10.5089/9781513578729.001
ISBN:
9781513578729
ISSN:
1018-5941
Pages:
33
Keywords:
WP; capital investment; book value; firm FE; external borrowing; Investment; Federal Procurement; Financing Constraints; Spending Multipliers; awarded firm-quarter contract; firm level; constrained firm; firm-quarter level; stock market information; investment response; firm size; Capital spending; Credit ratings; Currencies; Private investment
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2016: Issue 060