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Revisiting the Narrative Approach of Estimating Tax Multipliers

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Listed:
  • Shafik Hebous
  • Tom Zimmermann

Abstract

A number of recent studies regress a “narratively” identified measure of a macroeconomic shock directly on an outcome variable. In this note, we argue that this approach can be viewed as the reduced-form regression of an instrumental variable approach in which the narrative time series is used as an instrument for an endogenous series of interest. We construct confidence bands for the case in which the narrative shock and the endogenous variable of interest are only weakly correlated. We apply the method to four narrative tax measures recently constructed by Romer and Romer (2010), Cloyne (2013), and Mertens and Ravn (2012). These variables turn out to be weak instruments for cyclically adjusted tax revenues. Compared to the single-equation estimation, we find that using any of the considered narrative tax measures as an instrument for cyclically adjusted tax revenues yields estimates of multipliers that are statistically indistinguishable from zero after correcting the confidence bands for weak instruments.

Suggested Citation

  • Shafik Hebous & Tom Zimmermann, 2014. "Revisiting the Narrative Approach of Estimating Tax Multipliers," CESifo Working Paper Series 5040, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5040
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    File URL: https://www.cesifo-group.de/DocDL/cesifo1_wp5040.pdf
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    References listed on IDEAS

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    1. Kathryn M. E. Dominguez & Matthew D. Shapiro, 2013. "Forecasting the Recovery from the Great Recession: Is This Time Different?," American Economic Review, American Economic Association, vol. 103(3), pages 147-152, May.
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    4. Leeper, Eric M., 1997. "Narrative and VAR approaches to monetary policy: Common identification problems," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 641-657, December.
    5. Roberto Perotti, 2012. "The Effects of Tax Shocks on Output: Not So Large, but Not Small Either," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 214-237, May.
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    13. Karel Mertens & Morten O. Ravn, 2012. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated US Tax Policy Shocks," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 145-181, May.
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    Cited by:

    1. van der Wielen, Wouter, 2019. "The Macroeconomic Effects of Tax Reform: Evidence from the EU," JRC Working Papers on Taxation & Structural Reforms 2019-04, Joint Research Centre (Seville site).
    2. Winter, Christoph & Kraus, Beatrice, 2016. "Do Tax Changes Affect Credit Markets and Financial Frictions? Evidence from Credit Spreads," Annual Conference 2016 (Augsburg): Demographic Change 145636, Verein für Socialpolitik / German Economic Association.
    3. Niels Gilbert, 2019. "Euro area sovereign risk spillovers before and after the ECB's OMT announcement," DNB Working Papers 636, Netherlands Central Bank, Research Department.
    4. repec:bla:manchs:v:86:y:2018:i:s1:p:50-82 is not listed on IDEAS

    More about this item

    Keywords

    narrative approach; fiscal stabilization; multiplier; weak instruments;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • E69 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Other

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