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Measuring Tax Multipliers: The Narrative Method in Fiscal VARs

  • Carlo Favero
  • Francesco Giavazzi

This paper argues in favor of empirical models built by including in fiscal VAR models structural shocks identified via the narrative method. We first show that "narrative" shocks are orthogonal to the relevant information set a fiscal VAR. We then derive impulse responses to these shocks. The use of narrative shocks does not require the inversion of the moving-average representation of a VAR for the identification of the relevant shocks. Therefore, within this framework, fiscal multipliers can be identified and estimated even when, in the presence of "fiscal foresight," the MA representation of the VARs is not invertible. (JEL C32, E62, H20, H62, H63)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.4.2.69
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File URL: http://www.aeaweb.org/aej/pol/data/2010-0171_data.zip
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Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 4 (2012)
Issue (Month): 2 (May)
Pages: 69-94

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Handle: RePEc:aea:aejpol:v:4:y:2012:i:2:p:69-94
Note: DOI: 10.1257/pol.4.2.69
Contact details of provider: Web page: https://www.aeaweb.org/aej-policy
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  1. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense? A Reply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 943-48, November.
  2. Mertens, Karel & Ravn, Morten O, 2009. "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks," CEPR Discussion Papers 7505, C.E.P.R. Discussion Papers.
  3. Hess Chung & Eric M. Leeper, 2007. "What Has Financed Government Debt?," NBER Working Papers 13425, National Bureau of Economic Research, Inc.
  4. Ryan Chahrour & Stephanie Schmitt-Grohé & Martín Uribe, 2010. "A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier," NBER Working Papers 16169, National Bureau of Economic Research, Inc.
  5. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
  6. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  7. Karel Mertens & Morten Overgaard Ravn, 2010. "Online Appendix to "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks"," Technical Appendices 09-221, Review of Economic Dynamics.
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