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The Credit Channel of Public Procurement

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  • Gabriel, Ricardo Duque

Abstract

Public procurement accounts for one-third of government spending. In this paper, I document a new mechanism through which government procurement promotes firm growth: firms use procurement contracts to increase cash flow based lending. I use Portuguese administrative data from 2009 to 2019 and exploit public contests as a source of quasi-exogenous variation in the award of procurement contracts. Winning one additional euro from a procurement contract increases firm credit by 7 cents at lower interest rates. This finding highlights a mechanism through which future fiscal stimulus can impact the real economy today: procurement contracts increase firms’ net worth by increasing future cash flows that can be used as collateral to ease borrowing constraints and boost corporate liquidity. Consequently, this enhanced access to credit promotes higher investment and employment, with these effects being more pronounced and persistent in smaller and financially constrained firms. At the aggregate level, I empirically estimate that spending one additional euro in public procurement increases regional output by 1.3 euros with the credit channel accounting for 5% of it.

Suggested Citation

  • Gabriel, Ricardo Duque, 2024. "The Credit Channel of Public Procurement," Journal of Monetary Economics, Elsevier, vol. 147(S).
  • Handle: RePEc:eee:moneco:v:147:y:2024:i:s:s0304393224000540
    DOI: 10.1016/j.jmoneco.2024.103601
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    2. Altavilla, Carlo & Bussière, Matthieu & Galí, Jordi & Gorodnichenko, Yuriy & Gürkaynak, Refet S. & Rey, Hélène, 2024. "A research program on monetary policy for Europe," Journal of Monetary Economics, Elsevier, vol. 147(S).

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    More about this item

    Keywords

    Credit; Collateral; Corporate finance; Fiscal policy; Public procurement;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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