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Tax multipliers: Pitfalls in measurement and identification

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

Abstract

To analyze the pitfalls in measuring and identifying tax shocks, we build a novel value-added tax rate dataset for the period 1980–2009. The problem of identification (i.e., changes in tax policy not triggered by output fluctuations) is clearly disentangled from the problem of measurement (i.e., finding a tax policy variable under the direct control of policymakers). On the identification front, our results favor the use of narratives à la Romer and Romer (2010). On the measurement front, our findings support the use of tax rates as the true measure of tax policy as opposed to revenue-based measures, such as cyclically adjusted revenues.

Suggested Citation

  • Riera-Crichton, Daniel & Vegh, Carlos A. & Vuletin, Guillermo, 2016. "Tax multipliers: Pitfalls in measurement and identification," Journal of Monetary Economics, Elsevier, vol. 79(C), pages 30-48.
  • Handle: RePEc:eee:moneco:v:79:y:2016:i:c:p:30-48
    DOI: 10.1016/j.jmoneco.2016.03.003
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    More about this item

    Keywords

    Tax multiplier; Fiscal shocks; Identification; Narrative; Cyclically adjusted revenues;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F3 - International Economics - - International Finance
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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