NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

How large are the effects of tax changes?

Carlo Favero, Francesco Giavazzi

NBER Working Paper No. 15303
Issued in August 2009
NBER Program(s):   IFM

We use the time series of shifts in U.S. Federal tax liabilities constructed by Romer and Romer to estimate tax multipliers. Differently from the single-equation approach adopted by Romer and Romer, our estimation strategy (a Var that includes output, government spending and revenues, inflation and the nominal interest rate) does not rely upon the assumption that tax shocks are orthogonal to each other as well as to lagged values of other macro variables. Our estimated multiplier is much smaller: one, rather than three at a three-year horizon. When we split the sample in two sub-samples (before and after 1980) we find, before 1980, a multiplier whose size is never greater than one, after 1980 a multiplier not significantly different from zero. Following the findings in Bohn (1998), we also experiment with a model that includes debt and the non-linear government budget constraint. We find that, while in general not very important, the non-linearity that arises from the budget constraint makes a difference after 1980, when the response of fiscal variables to the level of the debt becomes stronger.

download in pdf format
   (219 K)

email paper

This paper is available as PDF (219 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15303

Users who downloaded this paper also downloaded these:
Favero and Giavazzi w12822 Debt and the Effects of Fiscal Policy
Blanchard and Perotti w7269 An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output
Romer and Romer w13264 The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks
Perotti w13143 In Search of the Transmission Mechanism of Fiscal Policy
Perotti w16786 The Effects of Tax Shocks on Output: Not So Large, But Not Small Either
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us