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A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier

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  • Ryan Chahrour
  • Stephanie Schmitt-Groh�
  • Mart�n Uribe

Abstract

The SVAR and narrative approaches to estimating tax multipliers deliver significantly different results. The former yields multipliers of about 1 and the latter of about 3. The two approaches differ along two important dimensions: the identification scheme and the reduced-form transmission mechanism. This paper uses a DSGE-model to evaluate the hypothesis that the difference in multipliers is due to differences in transmission mechanisms. The main finding of the paper is that this hypothesis is rejected. Instead, the observed differences in estimated multipliers are due either to the models failing to identify the same tax shock, or to small-sample uncertainty. (JEL E13, E23, E32, E62, H20)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.4.2.28
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 4 (2012)
Issue (Month): 2 (May)
Pages: 28-45

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Handle: RePEc:aea:aejpol:v:4:y:2012:i:2:p:28-45

Note: DOI: 10.1257/pol.4.2.28
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  1. Karel Mertens & Morten Ravn, 2010. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks," NBER Working Papers 16289, National Bureau of Economic Research, Inc.
  2. Stephanie Schmitt-Grohé & Martín Uribe, 2010. "Business Cycles With A Common Trend in Neutral and Investment-Specific Productivity," NBER Working Papers 16071, National Bureau of Economic Research, Inc.
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Cited by:
  1. J. Stephen Ferris, 2010. "Fiscal Policy from a Public Choice Perspective," Carleton Economic Papers 10-10, Carleton University, Department of Economics.
  2. Perotti, Roberto, 2011. "The Effects of Tax Shocks on Output: Not So Large, But Not Small Either," CEPR Discussion Papers 8252, C.E.P.R. Discussion Papers.
  3. Dario Caldara & Christophe Kamps, 2012. "The analytics of SVARs: a unified framework to measure fiscal multipliers," Finance and Economics Discussion Series 2012-20, Board of Governors of the Federal Reserve System (U.S.).
  4. Roberto perotti, 2011. "Expectations and Fiscal Policy: An Empirical Investigation," Working Papers 429, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  5. Roberto Perotti, 2011. "The Effects of Tax Shocks on Output: Not So Large, But Not Small Either," NBER Working Papers 16786, National Bureau of Economic Research, Inc.

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