Tax multipliers: Pitfalls in measurement and identification

Authors

Daniel Riera-Crichton, Bates CollegeFollow
Carlos A. Vegh, Johns Hopkins University
Guillermo Vuletin, Inter American Development Bank

Publication Title

Journal of Monetary Economics

Document Type

Article

Department or Program

Economics

Publication Date

5-1-2016

Keywords

Cyclically adjusted revenues, Fiscal shocks, Identification, Narrative, Tax multiplier

Abstract

To analyze the pitfalls in measuring and identifying tax shocks, we build a novel value-added tax rate dataset for the period 1980-2009. The problem of identification (i.e., changes in tax policy not triggered by output fluctuations) is clearly disentangled from the problem of measurement (i.e., finding a tax policy variable under the direct control of policymakers). On the identification front, our results favor the use of narratives à la Romer and Romer (2010). On the measurement front, our findings support the use of tax rates as the true measure of tax policy as opposed to revenue-based measures, such as cyclically adjusted revenues.

Recommended Citation

Riera-Crichton, D., Vegh, C.A. and Vuletin, G. 2016. "Tax multipliers: Pitfalls in measurement and identification." Journal of Monetary Econoimcs. 79: 30-48. https://doi.org/10.1016/j.jmoneco.2016.03.003