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

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Measuring Tax Multipliers: The Narrative Method in Fiscal VARs

Article Citation

Favero, Carlo, and Francesco Giavazzi. 2012. "Measuring Tax Multipliers: The Narrative Method in Fiscal VARs." American Economic Journal: Economic Policy, 4(2): 69-94.

DOI: 10.1257/pol.4.2.69

Abstract

This paper argues in favor of empirical models built by including in fiscal VAR models structural shocks identified via the narrative method. We first show that "narrative" shocks are orthogonal to the relevant information set a fiscal VAR. We then derive impulse responses to these shocks. The use of narrative shocks does not require the inversion of the moving-average representation of a VAR for the identification of the relevant shocks. Therefore, within this framework, fiscal multipliers can be identified and estimated even when, in the presence of "fiscal foresight," the MA representation of the VARs is not invertible. (JEL C32, E62, H20, H62, H63)

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Authors

Favero, Carlo (U Bocconi)
Giavazzi, Francesco (IGIER, U Bocconi and MIT)

JEL Classifications

C32: Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
E62: Fiscal Policy
H20: Taxation, Subsidies, and Revenue: General
H62: National Deficit; Surplus
H63: National Debt; Debt Management; Sovereign Debt

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