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Explaining Output Volatility: The Case of Taxation

  • Olaf Posch

This paper presents empirical evidence against the popular perception that macro volatility is exogenous. We obtain tax effects on macro aggregates in the stochastic neoclassical model. Taxes are shown to affect the second moment of output growth rates without affecting the first moment. Exploiting heterogeneity patterns in a panel of OECD countries, we estimate tax effects on macro volatility, explicitly modeling the unobserved variance process. We find a strong empirical link between taxes and output volatility. Accounting for non-stationarity of taxes and output volatility, we find empirical evidence of a cointegrating relationship.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2751.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2751
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