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Conventional and Unconventional Fiscal Multipliers

Paper Session

Friday, Jan. 5, 2018 10:15 AM - 12:15 PM

Pennsylvania Convention Center, 204-C
Hosted By: American Economic Association
  • Chair: Valerie Ramey, University of California-San Diego

The Effects of Tax Changes at the Zero Lower Bound: Evidence from Japan

Wataru Miyamoto
Bank of Canada
Thuy Lan Nguyen
Santa Clara University
Dmitriy Sergeyev
Bocconi University and IGIER
Akhisa Kato
University of Pennsylvania


We use the narrative approach to identify tax changes unrelated to current economic
conditions and to estimate the effect of these changes on macroeconomic variables
during and outside of the zero lower bound period in Japan. There is little difference
in reaction of output across the two periods.

Unconventional Fiscal Policy

Francesco D'Acunto
University of Maryland
Daniel Hoang
Karlsruhe Institute of Technology
Michael Weber
University of Chicago


Unconventional fiscal policy uses announcements of future increases in consumption taxes to generate inflation expectations and accelerate consumption expenditure. It is budget neutral and time consistent. We exploit a unique natural experiment for an empirical test of the effectiveness of unconventional fiscal policy. To comply with European Union law, the German government announced in November 2005 an unexpected 3-percentage-point increase in value-added tax (VAT), effective in 2007. The shock increased households' inflation expectations during 2006 and actual inflation in 2007. Germans' willingness to purchase durables increased by 34% after the shock, compared to before and to matched households in other European countries not exposed to the VAT shock. Income, wealth effects, or intratemporal substitution cannot explain these results.

What Do We Know About the Effects of Austerity?

Alberto Alesina
Harvard University
Carlo Favero
Bocconi University
Francesco Giavazzi
Bocconi University


This paper discusses how the composition of a fiscal consolidation determines the response of private consumption and investment as well as that of other variables such as business and consumers' confidence. We base our results on the analysis of 170 consolidation episodes occurred in 16 OECD countries over the past 30 years using a narrative approach and emphasizing the multi year nature of austerity episodes. We will show that expenditure based adjustments have been much less costly in terms of output losses than tax based ones. On average the costs of expenditure based consolidations are close to zero, while the tax based ones cause deep and long lasting recessions. We will also distinguish between government consumption and transfers. These results cannot be explained by accompanying policies and they hold also during the recent round of European austerity. In fact the latter does not look significantly different from previous periods of austerity episodes. The paper will also discuss which theoretical approach may explain these differences between tax based and spending based austerity.
Karel Mertens
Federal Reserve Bank of Dallas
Olivier Coibion
University of Texas-Austin
Eric Leeper
Indiana University
JEL Classifications
  • E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • H3 - Fiscal Policies and Behavior of Economic Agents