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

  • Umut Unal

    ()

    (Department of Economics, Florida International University)

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.

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File URL: http://casgroup.fiu.edu/pages/docs/3501/1315922085_11-09.pdf
File Function: First version, 2011
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Paper provided by Florida International University, Department of Economics in its series Working Papers with number 1109.

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Length: 48 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:fiu:wpaper:1109
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Web page: http://economics.fiu.edu

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  1. Corsetti, Giancarlo & Meier, André & Müller, Gernot, 2009. "Cross-border spillovers from fiscal stimulus," CEPR Discussion Papers 7535, C.E.P.R. Discussion Papers.
  2. Tommaso Monacelli & Roberto Perotti, 2010. "Fiscal Policy, the Real Exchange Rate and Traded Goods," Economic Journal, Royal Economic Society, vol. 120(544), pages 437-461, 05.
  3. Giordano, Raffaela & Momigliano, Sandro & Neri, Stefano & Perotti, Roberto, 2007. "The effects of fiscal policy in Italy: Evidence from a VAR model," European Journal of Political Economy, Elsevier, vol. 23(3), pages 707-733, September.
  4. Nooman Rebei & Hafedh Bouakez, 2004. "Why Does Private Consumption Rise After a Government Spending Shock?," Econometric Society 2004 North American Summer Meetings 417, Econometric Society.
  5. Roberto Perotti, 2007. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Working Papers 13143, National Bureau of Economic Research, Inc.
  6. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  7. Andrew Mountford & Harald Uhlig, 2005. "What are the Effects of Fiscal Policy Shocks?," SFB 649 Discussion Papers SFB649DP2005-039, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  8. Carlo Favero & Francesco Giavazzi, 2007. "Debt and the Effects of Fiscal Policy," NBER Working Papers 12822, National Bureau of Economic Research, Inc.
  9. Morten O. Ravn & Stephanie Schmitt-Grohe, 2004. "Deep Habits," 2004 Meeting Papers 208, Society for Economic Dynamics.
  10. Mertens, Karel & Ravn, Morten O, 2009. "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks," CEPR Discussion Papers 7505, C.E.P.R. Discussion Papers.
  11. Kim, Soyoung & Roubini, Nouriel, 2008. "Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S," Journal of International Economics, Elsevier, vol. 74(2), pages 362-383, March.
  12. K. Arin & Faik Koray, 2006. "Are some taxes different than others? An empirical investigation of the effects of tax policy in Canada," Empirical Economics, Springer, vol. 31(1), pages 183-193, March.
  13. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  14. Pablo Burriel & Francisco de Castro & Daniel Garrote & Esther Gordo & Joan Paredes & Javier J. Pérez, 2010. "Fiscal Policy Shocks in the Euro Area and the US: An Empirical Assessment," Fiscal Studies, Institute for Fiscal Studies, vol. 31(2), pages 251-285, 06.
  15. Karel Mertens & Morten Overgaard Ravn, 2010. "Online Appendix to "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks"," Technical Appendices 09-221, Review of Economic Dynamics.
  16. Evi Pappa, 2009. "The Effects Of Fiscal Shocks On Employment And The Real Wage," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 217-244, 02.
  17. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
  18. Wolff, Guntram B. & Tenhofen, Jörn & Heppke-Falk, Kirsten H., 2006. "The macroeconomic effects of exogenous fiscal policy shocks in Germany: a disaggregated SVAR analysis," Discussion Paper Series 1: Economic Studies 2006,41, Deutsche Bundesbank, Research Centre.
  19. Paul van den Noord, 2000. "The Size and Role of Automatic Fiscal Stabilizers in the 1990s and Beyond," OECD Economics Department Working Papers 230, OECD Publishing.
  20. Burnside, Craig & Eichenbaum, Martin & Fisher, Jonas D. M., 2004. "Fiscal shocks and their consequences," Journal of Economic Theory, Elsevier, vol. 115(1), pages 89-117, March.
  21. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.
  22. Christian Daude & Ángel Melguizo & Alejandro Neut, 2010. "Fiscal Policy in Latin America: Countercyclical and Sustainable at Last?," OECD Development Centre Working Papers 291, OECD Publishing.
  23. Tenhofen, Jörn & Wolff, Guntram B., 2007. "Does anticipation of government spending matter? Evidence from an expectation augmented VAR," Discussion Paper Series 1: Economic Studies 2007,14, Deutsche Bundesbank, Research Centre.
  24. de Castro, Francisco & Hernández de Cos, Pablo, 2008. "The economic effects of fiscal policy: The case of Spain," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 1005-1028, September.
  25. Roger Gordon & Laura Kalambokidis & Joel Slemrod, 2003. "A New Summary Measure of the Effective Tax Rate on Investment," NBER Working Papers 9535, National Bureau of Economic Research, Inc.
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