Tax policy and the macroeconomy: Measurement, identification, and non-linearities

Publication Title

Ensayos Sobre Politica Economica

Document Type


Department or Program


Publication Date



Fiscal policy, Identification, Measurement, Multiplier, Tax policy


This paper examines the measurement and identification of tax policy shocks using novel multi-country databases on tax rates. On the measurement front, we argue that there is no substitute for using tax rates, a true policy instrument, as opposed to the much more popular revenue-based measures, such as cyclically adjusted revenues. On the identification front, we argue that the narrative approach (whereby changes in tax rates are classified into exogenous or endogenous to the business cycle based on contemporaneous economic records) is the most accurate method. When properly measured and identified, tax multipliers for both industrial and developing countries are, on average, about -2. Further, we find important non-linearities with multipliers becoming bigger (in absolute value) as both the level of initial taxes and the size of tax changes become larger.

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