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The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks

  • Christina D. Romer
  • David H. Romer

This paper investigates the impact of tax changes on economic activity. We use the narrative record, such as presidential speeches and Congressional reports, to identify the size, timing, and principal motivation for all major postwar tax policy actions. This analysis allows us to separate legislated changes into those taken for reasons related to prospective economic conditions and those taken for more exogenous reasons. The behavior of output following these more exogenous changes indicates that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. (JEL E32, E62, H20, N12)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 100 (2010)
Issue (Month): 3 (June)
Pages: 763-801

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Handle: RePEc:aea:aecrev:v:100:y:2010:i:3:p:763-801
Note: DOI: 10.1257/aer.100.3.763
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  17. Jeremy Rudd & Karl Whelan, 2006. "Can rational expectations sticky-price models explain inflation dynamics?," Open Access publications 10197/199, School of Economics, University College Dublin.
  18. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, vol. 94(4), pages 1055-1084, September.
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