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American Economic Journal: Economic Policy: Vol. 4 No. 2 (May 2012)

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

Article Citation

Chahrour, Ryan, Stephanie Schmitt-Grohé, and Martín Uribe. 2012. "A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier." American Economic Journal: Economic Policy, 4(2): 28-45.

DOI: 10.1257/pol.4.2.28

Abstract

The SVAR and narrative approaches to estimating tax multipliers deliver significantly different results. The former yields multipliers of about 1 and the latter of about 3. The two approaches differ along two important dimensions: the identification scheme and the reduced-form transmission mechanism. This paper uses a DSGE-model to evaluate the hypothesis that the difference in multipliers is due to differences in transmission mechanisms. The main finding of the paper is that this hypothesis is rejected. Instead, the observed differences in estimated multipliers are due either to the models failing to identify the same tax shock, or to small-sample uncertainty. (JEL E13, E23, E32, E62, H20)

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Authors

Chahrour, Ryan (Columbia U)
Schmitt-Grohé, Stephanie (Columbia U)
Uribe, Martín (Columbia U)

JEL Classifications

E13: General Aggregative Models: Neoclassical
E23: Macroeconomics: Production
E32: Business Fluctuations; Cycles
E62: Fiscal Policy
H20: Taxation, Subsidies, and Revenue: General

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