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Are Fiscal Multipliers Estimated with Proxy‐SVARs Robust?

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  • Giovanni Angelini
  • Giovanni Caggiano
  • Efrem Castelnuovo
  • Luca Fanelli

Abstract

We estimate government spending and tax multipliers in the United States via a flexible proxy‐SVAR model, where identification is achieved by combining fiscal and non‐fiscal instruments with additional parametric restrictions. We find that, while the spending multiplier is robustly estimated to be larger than one across different models, the estimate of the tax multiplier is sensitive to the combination of instruments that we use. We unveil that the key factor behind these heterogeneous estimates is the assumption of orthogonality between total factor productivity (our main non‐fiscal proxy) and the tax shock. If this assumption is imposed, the tax multiplier is around one. If it is not imposed, the tax multiplier is three times as large. Our results point to the need of accounting for the large uncertainty surrounding the tax multiplier for the design of optimal fiscal policies.

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  • Giovanni Angelini & Giovanni Caggiano & Efrem Castelnuovo & Luca Fanelli, 2023. "Are Fiscal Multipliers Estimated with Proxy‐SVARs Robust?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(1), pages 95-122, February.
  • Handle: RePEc:bla:obuest:v:85:y:2023:i:1:p:95-122
    DOI: 10.1111/obes.12521
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    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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