Are fiscal multipliers estimated with proxy-SVARs robust?

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Title: Are fiscal multipliers estimated with proxy-SVARs robust?
ISBN: 978-952-323-340-9
Author: Angelini, Giovanni ; Caggiano, Giovanni ; Castelnuovo, Efrem ; Fanelli, Luca
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2020
Series number: 13/2020
Year of publication: 2020
Publication date: 13.7.2020
Pages: 45
Subject (yso): finanssipolitiikka; verot; verotus; häiriöt; taloudelliset mallit
JEL: C52; E62
Other keywords: fiscal policy; identification; fiscal multipliers; structural vector autoregressions
Abstract: How large are government spending and tax multipliers? The fiscal proxy-SVAR literature provides heterogeneous estimates, depending on which proxies - fiscal or non-fiscal - are used to identify fiscal shocks. We reconcile the existing estimates via flexible vector autoregressive model that allows to achieve identification in presence of a number of structural shocks larger than that of the available instruments. Our two main findings are the following. First, the estimate of the tax multiplier is sensitive to the assumption of orthogonality between total factor productivity (non-fiscal proxy) and tax shocks. If this correlation is assumed to be zero, the tax multiplier is found to be around one. If such correlation is nonzero, as supported by our empirical evidence, we find a tax multiplier three times as large. Second, we find the spending multiplier to be robustly larger than one across different models that feature different sets of instruments. Our results are robust to the joint employment of different fiscal and non-fiscal instruments.
Rights: https://helda.helsinki.fi/bof/copyright


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