Are Fiscal Multipliers Estimated with Proxy-SVARs Robust?

Quaderni - Working Paper DSE N° 1151, 2020

47 Pages Posted: 12 Aug 2020

See all articles by Giovanni Angelini

Giovanni Angelini

University of Bologna - School of Economics, Management, and Statistics

Giovanni Caggiano

Department of Economics, Monash University; University of Padova

Efrem Castelnuovo

University of Melbourne - Department of Economics; University of Padova - Department of Economics

Luca Fanelli

Universita di Bologna

Multiple version iconThere are 3 versions of this paper

Date Written: June 2020

Abstract

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

Angelini, Giovanni and Caggiano, Giovanni and Castelnuovo, Efrem and Fanelli, Luca, Are Fiscal Multipliers Estimated with Proxy-SVARs Robust? (June 2020). Quaderni - Working Paper DSE N° 1151, 2020, Available at SSRN: https://ssrn.com/abstract=3650225 or http://dx.doi.org/10.2139/ssrn.3650225

Giovanni Angelini (Contact Author)

University of Bologna - School of Economics, Management, and Statistics ( email )

40126 Bologna
Italy

Giovanni Caggiano

Department of Economics, Monash University ( email )

900 Dandenong Road
Caulfield East, Victoria 3145
Australia

HOME PAGE: http://https://sites.google.com/site/giovannicaggiano72/CV/home

University of Padova ( email )

Via 8 Febbraio, 2
Padova, Vicenza 35122
Italy

Efrem Castelnuovo

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

HOME PAGE: http://https://sites.google.com/site/efremcastelnuovo/home

University of Padova - Department of Economics

via Del Santo 33
Padova, 35123
Italy

Luca Fanelli

Universita di Bologna ( email )

Bologna, 40126
Italy

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