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Explaining Output Volatility: The Case of Taxation

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Author Info
Olaf Posch ()

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Abstract

This paper presents empirical evidence against the popular perception that macro volatility is exogenous. We obtain tax effects on macro aggregates in the stochastic neoclassical model. Taxes are shown to affect the second moment of output growth rates without affecting the first moment. Exploiting heterogeneity patterns in a panel of OECD countries, we estimate tax effects on macro volatility, explicitly modeling the unobserved variance process. We find a strong empirical link between taxes and output volatility. Accounting for non-stationarity of taxes and output volatility, we find empirical evidence of a cointegrating relationship.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2751.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2751

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Related research
Keywords: macroeconomic volatility; tax effects; continuous-time DSGE models;

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Find related papers by JEL classification:
E39 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Other
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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    Other versions:
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    Other versions:
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  21. MacKinnon, James G. & White, Halbert, 1985. "Some heteroskedasticity-consistent covariance matrix estimators with improved finite sample properties," Journal of Econometrics, Elsevier, vol. 29(3), pages 305-325, September. [Downloadable!] (restricted)
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  22. Alan J. Auerbach & Joel Slemrod, 1997. "The Economic Effects of the Tax Reform Act of 1986," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 589-632, June. [Downloadable!] (restricted)
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  24. Patrick Francois & Huw Lloyd-Ellis, 2003. "Animal Spirits Through Creative Destruction," American Economic Review, American Economic Association, vol. 93(3), pages 530-550, June. [Downloadable!]
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  26. Olaf Posch, 2007. "Structural estimation of jump-diffusion processes in macroeconomics," CREATES Research Papers 2007-23, School of Economics and Management, University of Aarhus. [Downloadable!]
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  28. Florin O. Bilbiie & André Meier & Gernot J. Müller, 2008. "What Accounts for the Changes in U.S. Fiscal Policy Transmission?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1439-1470, October. [Downloadable!] (restricted)
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