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The Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks: Theory and Empirical Evidence

Author

Listed:
  • Morten O. Ravn

    (European University Institute)

  • Karel Mertens

    (Cornell University)

Abstract

We provide empirical evidence on the effects of tax liability changes in the United States. We make a distinction between "surprise" and "anticipated" tax shocks. Surprise tax cuts give rise to a large boom in the economy. Anticipated tax liability tax cuts are instead associated with a contraction in output, investment and hours worked prior to their implementation. After their implementation, anticipated tax liability cuts lead to an economic expansion. We build a DSGE model with changes in tax rates that may be anticipated or not, estimate key parameters using a simulation estimator and show that it can account for the main features of the data. We argue that tax shocks are empirically important for U.S. business cycles and that the Reagan tax cut, which was largely anticipated, was a main factor behind the early 1980's recession.

Suggested Citation

  • Morten O. Ravn & Karel Mertens, 2008. "The Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks: Theory and Empirical Evidence," 2008 Meeting Papers 575, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:575
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    Cited by:

    1. Karabarbounis, Loukas, 2010. "Labor wedges and open economy puzzles," MPRA Paper 31370, University Library of Munich, Germany.
    2. Carlo A. Favero & Francesco Giavazzi, 2010. "Reconciling VAR-based and Narrative Measures of the Tax-Multiplier," Working Papers 361, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Eric M. Leeper & Alexander W. Richter & Todd B. Walker, 2012. "Quantitative Effects of Fiscal Foresight," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 115-144, May.
    4. 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.
    5. Todd B. Walker & Shu-Chun Susan Yang & Eric M. Leeper, 2008. "Fiscal Foresight: Analytical Issues," 2008 Meeting Papers 786, Society for Economic Dynamics.
    6. Brinca, Pedro, 2014. "Distortions in the neoclassical growth model: A cross-country analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 1-19.
    7. Robert Shimer, 2009. "Convergence in Macroeconomics: The Labor Wedge," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 280-297, January.
    8. Alloza, Mario, 2016. "The impact of taxes on income mobility," LSE Research Online Documents on Economics 86178, London School of Economics and Political Science, LSE Library.
    9. Eric Leeper & Todd Walker, 2011. "Information Flows and News Driven Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 55-71, January.
    10. FUJIWARA Ippei & WAKI Yuichiro, 2017. "Fiscal Forward Guidance: A case for selective transparency," Discussion papers 17087, Research Institute of Economy, Trade and Industry (RIETI).
    11. Carlo Favero & Francesco Giavazzi, 2009. "How large are the effects of tax changes?," NBER Working Papers 15303, National Bureau of Economic Research, Inc.
    12. Vivek Prasad, 2015. "Balanced Budget Tax Cuts in a Liquidity-Constrained Economy," Manchester School, University of Manchester, vol. 83, pages 87-119, September.
    13. Eric M. Leeper, 2009. "Anchoring fiscal expectations," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 72, pages 17-42, September.
    14. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
    15. Alexander Kriwoluzky, 2008. "Matching Theory and Data: Bayesian Vector Autoregression and Dynamic Stochastic General Equilibrium Models," SFB 649 Discussion Papers SFB649DP2008-060, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    16. repec:bpj:bejmac:v:18:y:2018:i:1:p:17:n:6 is not listed on IDEAS

    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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

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