Working Paper: CEPR ID: DP12335
Authors: Fabio Bertolotti; Massimiliano Marcellino
Abstract: We assess whether the effects of fiscal policy depend on the extent of uncertainty in the economy. Specifically, focusing on tax shocks, identified by the narrative series by Romer and Romer (2010), and various measures ofuncertainty, we use a Threshold VAR model to allow for dependence of the effects of the tax shocks both on the level of uncertainty and on the sign of the shock. Our two main empirical results are that the economy responds morepositively to tax cuts during periods of low uncertainty, while, in response to tax increases, monetary policy contributes significantly in making the reaction of the economy neutral during more uncertain times. We also show that existing theoretical models can explain, to a good extent, this empirical evidence.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower uncertainty (D81) | more positive response to tax cuts (H29) |
| high uncertainty (D89) | neutral response to tax increases (H29) |
| high uncertainty + contractionary tax shocks (H39) | more negative impact on GDP and consumption (E20) |
| monetary policy (E52) | mitigates negative effects of contractionary tax shocks during high uncertainty (H31) |
| high uncertainty + tax increases (H29) | neutral overall economic response (F69) |