Explaining Output Volatility: The Case of Taxation

42 Pages Posted: 24 Aug 2009

See all articles by Olaf Posch

Olaf Posch

Universität Hamburg, Department of Economics; CREATES

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Date Written: August 2009

Abstract

This paper presents empirical evidence against the popular perception that macro volatility is exogenous. We obtain tax effects on macro aggregates in the stochastic neoclassical model. Taxes are shown to affect the second moment of output growth rates without affecting the first moment. Exploiting heterogeneity patterns in a panel of OECD countries, we estimate tax effects on macro volatility, explicitly modeling the unobserved variance process. We find a strong empirical link between taxes and output volatility. Accounting for non-stationarity of taxes and output volatility, we find empirical evidence of a cointegrating relationship.

Keywords: macroeconomic volatility, tax effects, continuous-time DSGE models

JEL Classification: E32, E62

Suggested Citation

Posch, Olaf, Explaining Output Volatility: The Case of Taxation (August 2009). CESifo Working Paper Series No. 2751, Available at SSRN: https://ssrn.com/abstract=1458847 or http://dx.doi.org/10.2139/ssrn.1458847

Olaf Posch (Contact Author)

Universität Hamburg, Department of Economics ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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