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

Shafik Hebous () and Tom Zimmermann

No 2016/060, IMF Working Papers from International Monetary Fund

Abstract: 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.

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 (search for similar items in EconPapers)
Pages: 33
Date: 2016-03-10
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Journal Article: Can government demand stimulate private investment? Evidence from U.S. federal procurement (2021) Downloads
Working Paper: Can government demand stimulate private investment? Evidence from U.S. federal procurement (2019) Downloads
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Handle: RePEc:imf:imfwpa:2016/060