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A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier

Ryan Chahrour, Stephanie Schmitt-Grohe () and Martín Uribe ()

No 16169, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The SVAR and narrative approaches to estimating tax multipliers deliver significantly different results. The former yields multipliers of about 1 percent, whereas the latter produces much larger multipliers of about 3 percent. The SVAR and narrative approaches differ along two important dimensions: the identification scheme and the reduced-form transmission mechanism. This paper uses a DSGE-model approach to evaluate the hypothesis that the different tax multipliers stemming from the SVAR and narrative approaches are due to differences in the assumed reduced-form transmission mechanisms. The main finding of the paper is that in the context of the DSGE model employed this hypothesis is rejected. Instead, the observed differences in estimated multipliers are due either to both models failing to identify the same tax shock, or to small-sample uncertainty.

JEL-codes: E32 E62 H20 (search for similar items in EconPapers)
Date: 2010-07
Note: EFG PE
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Published as Ryan Chahrour & Stephanie Schmitt-Grohe & Martin Uribe, 2012. "A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 28-45, May.
Published as A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier , Ryan Chahrour, Stephanie Schmitt-Grohé, Martín Uribe. in Fiscal Policy (Trans-Atlantic Public Economics Seminar, TAPES) , Gordon and Perotti. 2012

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