Advances on the Macro Impact of Government Spending
Paper Session
Monday, Jan. 4, 2027 10:15 AM - 12:15 PM (EST)
- Chair: Era Dabla-Norris, International Monetary Fund
Subcontracting in Federal Spending: Micro and Macro Implications
Abstract
This paper studies the critical but underexplored role of subcontracting in shaping the spatial and firm-level effects of federal government spending. Leveraging newly available data on defense subcontract awards since 2011, linked with NETS establishment-level data, we examine prime–subcontractor relationships across counties, industries and time. We document three stylized facts: (1) subcontracting leads to widespread geographic relocation of federal dollars; (2) it reallocates spending across sectors, notably from service-sector primes to manufacturing subcontractors; and (3) large firms dominate subcontracting networks, even receiving subawards from smaller primes. Accounting for this geographic relocation shows that conventional estimates understate local multiplier effects by approximately 20%. While subcontracting broadens the spatial reach of federal spending, its average local impact is smaller than that of prime contracts. Establishment-level evidence shows that subcontractors—especially large ones and those in goods sectors—exhibit weaker and less persistent employment and revenue gains than prime contractors, reflecting the shorter and less stable nature of subcontracts. These weaker multipliers also stem from the skewed distribution of subcontracts toward large manufacturers. Overall, our findings reveal substantial heterogeneity in how procurement opportunities diffuse through the private sector and shape the effects of federal spending.Optimal Industry Policy with Fiscal Constraints
Abstract
We study optimal industrial and trade policy in a dynamic small open economy with sovereign debt and a fiscal rule. The government chooses tariffs, export tax, subsidies, and debt subject to a debt-responsive rule that ties the primary balance to the debt-to-output ratio. The rule creates a fiscal wedge in optimal policy: trade and industrial instruments affect fiscal resources directly through revenues and indirectly by altering output, which determines future fiscal requirements. The wedge operates through a dynamic channel, as policies that compress output tighten future fiscal constraints by raising the debt ratio. The framework highlights how fiscal rules reshape optimal intervention in open economies.Breaking Down the U.S. Employment Multiplier Using Micro-Level Data
Abstract
Using newly matched U.S. defense contract data and restricted administrative employment records, we study how defense procurement affects employment across firms and regions. We show that the employment effects of defense procurement are initially concentrated among large incumbent contractors and imply a high cost of roughly $290,000 per job-year in 2008 dollars. Employment in non-contracting firms is slightly negative on impact (crowding-out), but positive spillovers emerge gradually and account for about half of total regional employment gains by the third year after a spending shock, pointing to delayed but persistent medium-run effects across industries. Using a new measure of unanticipated contract awards, we also find persistent employment gains at recipient establishments. A comparison of establishment- and regional-level responses implies that recipient establishments account for only about 18% of contractor-side employment gains within one year, highlighting the importance of spillovers across defense contractors.Discussant(s)
Ricardo Duque Gabriel
,
Federal Reserve Board
Daniel Murphy
,
University of Virginia
Francisco Roldan
,
International Monetary Fund
Paula Donaldson
,
Brown University
JEL Classifications
- E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- H5 - National Government Expenditures and Related Policies