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Tax Multipliers: Pitfalls in Measurement and Identification

Daniel Riera-Crichton (), Carlos Vegh () and Guillermo Vuletin ()

No 18497, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We contribute to the literature on tax multipliers by analyzing the pitfalls in identification and measurement of tax shocks. Our main focus is on disentangling the discussion regarding the identification of exogenous tax policy shocks (i.e., changes in tax policy that are not the result of policymakers responding to output fluctuations) from the discussion related to the measurement of tax policy (i.e., finding a tax policy variable under the direct control of the policymaker). For this purpose, we build a novel value-added tax rate dataset and the corresponding cyclically- adjusted revenue measure at a quarterly frequency for 14 industrial countries for the period 1980-2009. On the identification front, our findings favor the use of narratives à la Romer and Romer (2010) to identify exogenous fiscal shocks as opposed to the identification via SVAR. On the (much less explored) measurement front, our results strongly support the use of tax rates as a true measure of the tax policy instrument as opposed to widely-used, revenue-based measures, such as cyclically-adjusted revenues. While tax multipliers tend to be very small (in absolute value) or even positive when using cyclically-adjusted revenues, they are significantly negative (i.e., tax policy is contractionary) when using tax rates.

JEL-codes: E32 E62 F3 H20 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-acc, nep-mac, nep-pbe and nep-pub
Note: IFM
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Published as Daniel Riera-Crichton & Carlos A. Vegh & Guillermo Vuletin, 2016. "Tax multipliers: Pitfalls in measurement and identification," Journal of Monetary Economics, vol 79, pages 30-48.

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