DP8973 A Reconciliation of SVAR and Narrative Estimates of Tax Multipliers

Author(s): Karel Mertens, Morten O Ravn
Publication Date: May 2012
Keyword(s): fiscal policy, measurement error, narrative identification, tax changes, vector autoregressions
JEL(s): E20, E32, E62, H30
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8973

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.