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The Analytics of SVARs: A Unified Framework to Measure Fiscal Multipliers

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  • Dario Caldara
  • Christophe Kamps

Abstract

Do tax cuts and spending increases stimulate output? Studies that identify fiscal shocks using structural vector autoregressions (SVAR) have reached different conclusions. In this article, we show analytically that this lack of consensus reflects different assumptions on the fiscal rules that—by relating tax and spending policies to macroeconomic conditions—determine the identification of fiscal shocks and the associated fiscal multipliers. We then propose a new identification strategy based on a proxy SVAR that uses non-fiscal instruments to directly estimate the parameters of the fiscal rules. We find that spending increases stimulate output more than tax cuts..

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  • Dario Caldara & Christophe Kamps, 2017. "The Analytics of SVARs: A Unified Framework to Measure Fiscal Multipliers," Review of Economic Studies, Oxford University Press, vol. 84(3), pages 1015-1040.
  • Handle: RePEc:oup:restud:v:84:y:2017:i:3:p:1015-1040.
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    More about this item

    Keywords

    Fiscal policy; Identification; Structural vector autoregressions;
    All these keywords.

    JEL classification:

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

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