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Tax Multipliers: Pitfalls in Measurement and Identification

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  • Daniel Riera-Crichton
  • Carlos A. Vegh
  • Guillermo Vuletin

Abstract

We contribute to the literature on tax multipliers by analyzing the pitfalls in identification and measurement of tax shocks. Our main focus is on disentangling the discussion regarding the identification of exogenous tax policy shocks (i.e., changes in tax policy that are not the result of policymakers responding to output fluctuations) from the discussion related to the measurement of tax policy (i.e., finding a tax policy variable under the direct control of the policymaker). For this purpose, we build a novel value-added tax rate dataset and the corresponding cyclically-adjusted revenue measure at a quarterly frequency for 14 industrial countries for the period 1980-2009. We also provide complementary evidence using Romer and Romer (2010) and Barro and Redlick (2011) data for the United States. On the identification front, our findings favor the use of narratives à la Romer and Romer (2010) to identify exogenous fiscal shocks as opposed to the identification via SVAR. On the (much less explored) measurement front, our results strongly support the use of tax rates as a true measure of the tax policy instrument as opposed to widely-used, revenue-based measures, such as cyclically-adjusted revenues.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18497.

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Date of creation: Oct 2012
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Handle: RePEc:nbr:nberwo:18497

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References

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  1. Robert J. Gordon & Robert Krenn, 2010. "The End of the Great Depression 1939-41: Policy Contributions and Fiscal Multipliers," NBER Working Papers 16380, National Bureau of Economic Research, Inc.
  2. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
  3. Valerie A. Ramey, 2009. "Identifying Government Spending Shocks: It's All in the Timing," NBER Working Papers 15464, National Bureau of Economic Research, Inc.
  4. Carlo Favero & Francesco Giavazzi, 2007. "Debt and the effects of fiscal policy," Working Papers 07-4, Federal Reserve Bank of Boston.
  5. Christina D. Romer & David H. Romer, 2012. "The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era," NBER Working Papers 17860, National Bureau of Economic Research, Inc.
  6. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2008. "Fiscal Foresight: Analytics and Econometrics," NBER Working Papers 14028, National Bureau of Economic Research, Inc.
  7. Ethan Ilzetzki & Enrique G. Mendoza & Carlos A. Végh, 2010. "How Big (Small?) are Fiscal Multipliers?," CEP Discussion Papers dp1016, Centre for Economic Performance, LSE.
  8. John F. Cogan & Tobias Cwik & John B. Taylor & Volker Wieland, 2009. "New Keynesian versus Old Keynesian Government Spending Multipliers," NBER Working Papers 14782, National Bureau of Economic Research, Inc.
  9. Jonas D. M. Fisher & Ryan Peters, 2009. "Using stock returns to identify government spending shocks," Working Paper Series WP-09-03, Federal Reserve Bank of Chicago.
  10. Alan J. Auerbach & Yuriy Gorodnichenko, 2011. "Fiscal Multipliers in Recession and Expansion," NBER Working Papers 17447, National Bureau of Economic Research, Inc.
  11. Burnside, Craig & Eichenbaum, Martin & Fisher, Jonas D. M., 2004. "Fiscal shocks and their consequences," Journal of Economic Theory, Elsevier, vol. 115(1), pages 89-117, March.
  12. Woodford, Michael, 2010. "Simple Analytics of the Government Expenditure Multiplier," CEPR Discussion Papers 7704, C.E.P.R. Discussion Papers.
  13. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
  14. Carlos A. Vegh & Guillermo Vuletin, 2012. "How is Tax Policy Conducted over the Business Cycle?," NBER Working Papers 17753, National Bureau of Economic Research, Inc.
  15. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
  16. Favero, Carlo A. & Giavazzi, Francesco, 2010. "Reconciling VAR-based and Narrative Measures of the Tax-Multiplier," CEPR Discussion Papers 7769, C.E.P.R. Discussion Papers.
  17. von Hagen, Jurgen & Strauch, Rolf R, 2001. " Fiscal Consolidations: Quality, Economic Conditions, and Success," Public Choice, Springer, vol. 109(3-4), pages 327-46, December.
  18. 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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Cited by:
  1. Andrew Bossie, 2013. "The Effect of Fiscal Policy Shocks on the Flow of Funds," 2013 Papers pbo741, Job Market Papers.
  2. Carlos A. Vegh & Guillermo Vuletin, 2014. "Social Implications of Fiscal Policy Responses During Crises," NBER Working Papers 19828, National Bureau of Economic Research, Inc.
  3. Giuseppe Bertola & John Driffill & Harold James & Hans-Werner Sinn & Jan-Egbert Sturm & Ákos Valentinyi, 2014. "Chapter 3: Austerity: Hurting but Helping," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 75-90, 02.
  4. Salvatore Dell'Erba & Todd D. Mattina & Agustin Roitman, 2013. "Pressure or Prudence? Tales of Market Pressure and Fiscal Adjustment," IMF Working Papers 13/170, International Monetary Fund.
  5. Cordella, Tito & Federico, Pablo & Vegh, Carlos & Vuletin, Guillermo, 2014. "Reserve requirements in the brave new macroprudential world," Policy Research Working Paper Series 6793, The World Bank.

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