A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier

29 Pages Posted: 19 Jul 2010

See all articles by Ryan Chahrour

Ryan Chahrour

Boston College - Department of Economics

Stephanie Schmitt-Grohé

Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2010

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 Classification: E32, E62, H30

Suggested Citation

Chahrour, Ryan A. and Schmitt-Grohe, Stephanie and Uribe, Martin, A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier (July 2010). CEPR Discussion Paper No. DP7930, Available at SSRN: https://ssrn.com/abstract=1641005

Ryan A. Chahrour (Contact Author)

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Stephanie Schmitt-Grohe

Centre for Economic Policy Research (CEPR) ( email )

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National Bureau of Economic Research (NBER)

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Martin Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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