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Reconciling VAR-based and Narrative Measures of the Tax-Multiplier

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  • Carlo A. Favero
  • Francesco Giavazzi

Abstract

The currently available empirical evidence shows remarkable differences between various estimates of the effects on U.S output of an exogenous shift in Federal tax liabilities. Shocks identified via the narrative method, imply a multiplier of about three over . an horizon of three years. Tax shocks identified in fiscal VAR models deliver a much smaller multipier of about one. Is this heterogeneity real, or is it simply the result of different approaches to the identification of exogenous shifts in taxes? Or of different specifications of the empirical model used to estimate the tax multiplier? In this paper we reconcile this apparently contradictory evidence by showing that the large multiplier obtained via the narrative identification methods are generated by the choice of a limited information approach in their estimation and not by the different nature of the shocks. Using the shocks identified by a Narrative methods in a multivariate dynamic model delivers estimates of the tax multiplier very much in line with those obtained in the traditional fiscal VAR approach.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 361.

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Date of creation: 2010
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Handle: RePEc:igi:igierp:361

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  1. Fabio C. Bagliano & Carlo A. Favero, . "Information from financial markets and VAR measures of monetary policy," Working Papers 135, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2007. "Assessing Structural VARs," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 1-106 National Bureau of Economic Research, Inc.
  3. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2008. "Fiscal Foresight: Analytics and Econometrics," Caepr Working Papers 2008-013, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  4. Karel Mertens & Morten O. Ravn, 2008. "The Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks: Theory and Empirical Evidence," Economics Working Papers ECO2008/05, European University Institute.
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Cited by:
  1. Tommaso Monacelli & Roberto Perotti & Antonella Trigari, 2011. "Taxes and the Labor Market," Working Papers Central Bank of Chile 623, Central Bank of Chile.
  2. Matteo Fragetta & Emanuel Gasteiger, 2012. "Fiscal Foresight, Limited Information and the Effects of Government Spending Shocks," Working Papers Series 2 12-02, ISCTE-IUL, Business Research Unit (BRU-IUL).
  3. Karel Mertens & Morten O. Ravn, 2010. "Technology - Hours Redux: Tax Changes and the Measurement of Technology Shocks," NBER Chapters, in: NBER International Seminar on Macroeconomics 2010, pages 41-76 National Bureau of Economic Research, Inc.
  4. 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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