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Rethinking the Effects of Fiscal Policy on Macroeconomic Aggregates: A Disaggregated SVAR Analysis

Author

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  • Umut Unal

    (Department of Economics, Florida International University)

Abstract

This paper characterizes the dynamic effects of net tax and government spending shocks on prices, interest rate, GDP and its private components in four OECD countries using a structural VAR approach. For the first time in this literature, I propose a structural decomposition of total net taxes into four components: corporate income taxes, income taxes, indirect taxes and social insurance taxes. The paper provides estimates of the responses of macroeconomic aggregates to innovations in these net tax components. The main conclusions of the analysis can be summarized as follows: 1) decompositions of total net tax innovations show that net tax components have different impacts on economic variables; 2) the size and persistence of these effects vary across countries depending upon the strength of wealth, substitution, and income effects reflecting the structure of the economies; 3) positive tax multipliers reported in previous studies are found only for the corporate income tax in the US, Canada, and France and for the social security tax in the US; 4) while we find that private investment is crowded out both by taxation and government spending in the UK and the US as consistent with the neo-classical model, our results for France and partially for Canada, indicate that there are opposite effects of tax and spending increases on private investment in line with Keynesian theory; and 5) private consumption is crowded in by government spending for all countries except the UK and crowded out by taxation in all countries except France. While the former result is consistent with a Keynesian model, the latter is in line with neo-classical theory.

Suggested Citation

  • Umut Unal, 2011. "Rethinking the Effects of Fiscal Policy on Macroeconomic Aggregates: A Disaggregated SVAR Analysis," Working Papers 1109, Florida International University, Department of Economics.
  • Handle: RePEc:fiu:wpaper:1109
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    References listed on IDEAS

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    Cited by:

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    3. Lara Wemans & Manuel Coutinho Pereira, 2013. "Output effects of fiscal policy in Portugal: a structural VAR approach," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.

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    More about this item

    Keywords

    Fiscal shocks; Structural vector autoregression; Tax policy;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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