A Reconciliation of SVAR and Narrative Estimates of Tax Multipliers

44 Pages Posted: 25 May 2012

See all articles by Karel Mertens

Karel Mertens

Federal Reserve Banks - Federal Reserve Bank of Dallas

Morten O. Ravn

University College London

Date Written: May 2012

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 Classification: E20, E32, E62, H30

Suggested Citation

Mertens, Karel and Ravn, Morten O., A Reconciliation of SVAR and Narrative Estimates of Tax Multipliers (May 2012). CEPR Discussion Paper No. DP8973, Available at SSRN: https://ssrn.com/abstract=2066344

Karel Mertens (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Morten O. Ravn

University College London ( email )

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