A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier
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.
This paper grew out of Martin Uribe's discussion of Favero and Giavazzi (2010) at the NBER's TAPES conference held in Varenna, Italy in June 2010. The authors would like to thank for comments seminar participants at that conference, especially Carlo Favero, Roberto Perotti, Morten Ravn, and Marty Eichenbaum. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Ryan Chahrour & Stephanie Schmitt-Grohe & Martin Uribe, 2012. "A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 28-45, May. citation courtesy of
A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier, Ryan Chahrour, Stephanie Schmitt-Grohé, Martín Uribe. in Trans-Atlantic Public Economics Seminar (TAPES), Fiscal Policy, Gordon and Perotti. 2012