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Explaining Output Volatility: The Case of Taxation

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  • Olaf Posch

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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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2751.

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

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

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Cited by:
  1. Almut Veraart, 2008. "Inference for the jump part of quadratic variation of Itô semimartingales," CREATES Research Papers 2008-17, School of Economics and Management, University of Aarhus.
  2. Olaf Posch & Klaus Wälde, 2006. "Natural volatility, welfare and taxation," Working Papers, Business School - Economics, University of Glasgow 2007_33, Business School - Economics, University of Glasgow.
  3. Andrey Launov & Olaf Posch & Klaus Wälde, 2012. "On the estimation of the volatility-growth link," CREATES Research Papers 2012-21, School of Economics and Management, University of Aarhus.
  4. Michael Funke & Yu-Fu Chen, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 20908, Hamburg University, Department of Economics.
  5. Robert Feicht & Wolfgang Stummer, 2010. "Complete Closed-form Solution to a Stochastic Growth Model and Corresponding Speed of Economic Recovery preliminary," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c015_041, DEGIT, Dynamics, Economic Growth, and International Trade.
  6. Olaf POSCH & Klaus WALDE, 2009. "On the non-causal link between volatility and growth," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 2009025, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  7. Spiliopoulos, Leonidas, 2010. "The determinants of macroeconomic volatility: A Bayesian model averaging approach," MPRA Paper 26832, University Library of Munich, Germany.
  8. Posch, Olaf, 2009. "Structural estimation of jump-diffusion processes in macroeconomics," Journal of Econometrics, Elsevier, Elsevier, vol. 153(2), pages 196-210, December.
  9. Chen, Yu-Fu & Funke, Michael, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2009-31, Scottish Institute for Research in Economics (SIRE).
  10. Attinasi, Maria-Grazia & Checherita-Westphal, Cristina & Rieth, Malte, 2011. "Labour tax progressivity and output volatility: evidence from OECD countries," Working Paper Series, European Central Bank 1380, European Central Bank.
  11. Olaf Posch & Klaus Wälde, 2011. "On the link between volatility and growth," Journal of Economic Growth, Springer, Springer, vol. 16(4), pages 285-308, December.

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