Are Fiscal Multipliers Estimated with Proxy-SVARs Robust?
Quaderni - Working Paper DSE N° 1151, 2020
47 Pages Posted: 12 Aug 2020
Date Written: June 2020
How large are government spending and tax multipliers? The fiscal proxy-SVAR literature provides heterogeneous estimates, depending on which proxies - fiscal or non-fiscal - are used to identify fiscal shocks. We reconcile the existing estimates via a flexible vector auto-regressive model that allows to achieve identification in presence of a number of structural shocks larger than that of the available instruments. Our two main findings are the following. First, the estimate of the tax multiplier is sensitive to the assumption of orthogonality between total factor productivity (non-fiscal proxy) and tax shocks. If this correlation is assumed to be zero, the tax multiplier is found to be around one. If such correlation is non-zero, as supported by our empirical evidence, we find a tax multiplier three times as large. Second, we find the spending multiplier to be robustly larger than one across different models that feature different sets of instruments. Our results are robust to the joint employment of different fiscal and non-fiscal instruments.
Keywords: fiscal multipliers, fiscal policy, identification, instruments, structural vector auto-regressions
JEL Classification: C52, E62
Suggested Citation: Suggested Citation