Working Paper: CEPR ID: DP8973
Authors: Karel Mertens; Morten O. Ravn
Abstract: Existing empirical estimates of US nationwide tax multipliers vary from close to zero to very large. Using narrative measures as proxies for structural shocks to total tax revenues in an SVAR, we estimate tax multipliers at the higher end of the range: around two on impact and up to three after 6 quarters. We show that earlier findings of lower multipliers can be explained by an output elasticity of tax revenues assumption that is contradicted by empirical evidence or by failure to account for measurement error in narrative series of tax shocks.
Keywords: Fiscal Policy; Measurement Error; Narrative Identification; Tax Changes; Vector Autoregressions
JEL Codes: E20; E32; E62; H30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax shocks (H26) | economic output (E23) |
| tax cuts (H29) | economic output (E23) |
| output elasticity of tax revenues (H29) | estimated tax multipliers (C39) |
| measurement error in narrative tax shock series (C51) | estimated tax multipliers (C39) |
| proxy SVAR approach (C32) | estimated tax multipliers (C39) |
| identification strategies (Z13) | estimated tax multipliers (C39) |