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Explaining Output Volatility: the Case of Taxation

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  • Olaf Posch

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Abstract

This paper studies the determinants of output volatility in OECD countries to shed light on the sources of the observed heterogenous patterns. For this purpose, we derive tax effects on the variance of output in a stochastic version of the Ramsey model. Using panel data methods we find that effective tax rates à la Mendoza et al. (1994) are indeed (Huber) robust and substantial in explaining output volatility. Together with other controls they account for roughly two third of its variation. Taxes on labor and corporate income are found to be negatively related to macroeconomic volatility whereas the capital income tax has the opposite effect. No clear evidence is found that tax reforms account for the moderation in the U.S. while for the UK changes in tax rates can explain three quarter of the moderation from the 1980s to the 1990s.

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Bibliographic Info

Paper provided by Hamburg University, Department of Economics in its series Quantitative Macroeconomics Working Papers with number 20608.

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Date of creation: Aug 2006
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Handle: RePEc:ham:qmwops:20608

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Keywords: Output volatility; Stochastic models; Tax effects; Natural volatility;

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Cited by:
  1. Chen, Yu-Fu & Funke, Michael, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," SIRE Discussion Papers 2009-31, Scottish Institute for Research in Economics (SIRE).
  2. Olaf Posch & Klaus Wälde, 2006. "Natural volatility, welfare and taxation," Computing in Economics and Finance 2006 95, Society for Computational Economics.
  3. 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.
  4. Olaf Posch & Klaus Wälde, 2009. "On the non-causal link between volatility and growth," Economics Working Papers 2009-10, School of Economics and Management, University of Aarhus.
  5. Olaf Posch, 2007. "Structural estimation of jump-diffusion processes in macroeconomics," CREATES Research Papers 2007-23, School of Economics and Management, University of Aarhus.
  6. 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.
  7. Olaf Posch & Klaus Wälde, 2011. "On the link between volatility and growth," Journal of Economic Growth, Springer, vol. 16(4), pages 285-308, December.
  8. Spiliopoulos, Leonidas, 2010. "The determinants of macroeconomic volatility: A Bayesian model averaging approach," MPRA Paper 26832, University Library of Munich, Germany.
  9. Robert Feicht & Wolfgang Stummer, 2010. "Complete Closed-form Solution to a Stochastic Growth Model and Corresponding Speed of Economic Recovery preliminary," DEGIT Conference Papers c015_041, DEGIT, Dynamics, Economic Growth, and International Trade.
  10. Attinasi, Maria-Grazia & Checherita-Westphal, Cristina & Rieth, Malte, 2011. "Labour tax progressivity and output volatility: evidence from OECD countries," Working Paper Series 1380, European Central Bank.

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