Working Paper: CEPR ID: DP7930
Authors: Ryan Chahrour; Stephanie Schmitt-Grohe; Martin Uribe
Abstract: The SVAR and narrative approaches to estimating tax multipliers deliver significantly different results. The former yields multipliers of about 1 percent, whereas the latter produces much larger multipliers of about 3 percent. The SVAR and narrative approaches differ along two important dimensions: the identification scheme and the reduced-form transmission mechanism. This paper uses a DSGE-model approach to evaluate the hypothesis that the different tax multipliers stemming from the SVAR and narrative approaches are due to differences in the assumed reduced-form transmission mechanisms. The main finding of the paper is that in the context of the DSGE model employed this hypothesis is rejected. Instead, the observed differences in estimated multipliers are due either to both models failing to identify the same tax shock, or to small-sample uncertainty.
Keywords: DSGE model; narrative approach; tax multiplier; VAR; tax shocks
JEL Codes: E32; E62; H30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| SVAR approach (C32) | tax multipliers (H29) |
| narrative approach (B53) | tax multipliers (H29) |
| different identification schemes (P50) | different estimates of tax multipliers (H29) |
| small sample uncertainty (C83) | observed differences in estimated tax multipliers (H31) |
| correctly identifying exogenous tax shock (H29) | average tax multipliers consistent with true multiplier (H29) |