Explaining Output Volatility: the Case of Taxation

Olaf Posch

Quantitative Macroeconomics Working Papers from Hamburg University, Department of Economics

Abstract: This paper studies the determinants of output volatility in OECD countries to shed light on the sources of the observed heterogenous patterns. For this purpose, we derive tax effects on the variance of output in a stochastic version of the Ramsey model. Using panel data methods we find that effective tax rates à la Mendoza et al. (1994) are indeed (Huber) robust and substantial in explaining output volatility. Together with other controls they account for roughly two third of its variation. Taxes on labor and corporate income are found to be negatively related to macroeconomic volatility whereas the capital income tax has the opposite effect. No clear evidence is found that tax reforms account for the moderation in the U.S. while for the UK changes in tax rates can explain three quarter of the moderation from the 1980s to the 1990s.

Keywords: Output volatility; Stochastic models; Tax effects; Natural volatility (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2006-08
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Explaining output volatility: The case of taxation (2011)
Working Paper: Explaining Output Volatility: The Case of Taxation (2009)
Working Paper: Explaining output volatility: The case of taxation (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ham:qmwops:20608

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