This paper estimates the dynamic effects of changes in taxes in the United States. We distinguish between changes in personal and corporate income taxes and develop a new narrative account of federal ...tax liability changes in these two tax components. We develop an estimator which uses narratively identified tax changes as proxies for structural tax shocks and apply it to quarterly post-WWII data. We find that short run output effects of tax shocks are large and that it is important to distinguish between different types of taxes when considering their impact on the labor market and on expenditure components.
Existing empirical estimates of US nationwide tax multipliers vary from close to zero to very large. Using narrative measures as proxies for structural shocks to total tax revenues in an SVAR, we ...estimate tax multipliers at the higher end of the range: around two on impact and up to three after 6 quarters. We show that earlier findings of lower multipliers can be explained by an output elasticity of tax revenues assumption that is contradicted by empirical evidence or by failure to account for measurement error in narrative series of tax shocks.
•Existing empirical estimates of US nationwide tax multipliers vary from close to zero to very large.•Using narrative proxies for tax shocks in an SVAR, we estimate large tax multipliers (two on impact).•Previous lower SVAR estimates assume an output elasticity of revenues rejected by narrative data.•Previous lower narrative estimates fail to account for measurement error.
•Study model with endogenous countercyclical income risk.•Model combines incomplete markets, nominal rigidities and labor market frictions.•Model features amplification of shocks due to goods-labor ...markets interaction.•Study impact of job separation and search efficiency shocks.•Model can account for persistent drop in job finding rate during Great Recession.
We study a model where households are subject to uninsurable unemployment risk, price setting is subject to nominal rigidities, and the labor market is characterized by matching frictions and inflexible wages. Higher risk of job loss and worsening job finding prospects during unemployment depress goods demand because of a precautionary savings motive. Lower goods demand reduces job vacancies and the job finding rate producing an amplification mechanism due to endogenous countercyclical income risk. Amplification derives from the combination of incomplete financial markets and frictional goods and labor markets. The model can account for key features of the Great Recession.
We provide evidence on the dynamic effects of tax liability changes in the United States. We distinguish between surprise and anticipated tax changes. Preannounced but not yet implemented tax cuts ...give rise to contractions in output, investment, and hours worked while real wages increase. There are no significant anticipation effects on aggregate consumption. Implemented tax cuts, regardless of their timing, have expansionary effects, on output, consumption, investment, hours worked, and real wages. Results are shown to be robust. Tax shocks are important impulses to the US business cycle and anticipation effects have been important during several business cycle episodes.
In this reply to a comment by Jentsch and Lunsford, we show that the evidence for economic and statistically significant macroeconomic effects of tax changes in Mertens and Ravn (2013) remains ...present for a range of asymptotically valid inference methods.
Abstract
Recently developed HANK models, which combine Heterogeneous Agents and New Keynesian frictions, have had a considerable impact on macroeconomics. However, due to the complexity of such ...models, the literature has focused on numerically solved models and therefore little is known about their general properties. This paper presents a tractable HANK model that integrates Search and Matching (SAM) frictions in the labor market. The model features an endogenous idiosyncratic earnings risk, which may be procyclical or countercyclical. When this risk is countercyclical, which we argue is the empirically plausible case, there is a downward pressure on real interest rates in recessions due to a precautionary savings motive. We show that in this setting (a) the economy may get stuck in a high-unemployment steady state, (b) the Taylor principle is insufficient to eliminate the local indeterminacy of the intended steady state, and (c) nominal rigidities and inincomplete markets are complementary in terms of amplifying the impact of shocks on the macroeconomy.
We document the portfolio activity of federal housing agencies and provide evidence on its impact on mortgage markets and the economy. Through a narrative analysis, we identify historical policy ...changes leading to expansions or contractions in agency mortgage holdings. Based on those regulatory events that we classify as unrelated to short-run cyclical or credit market shocks, we find that an increase in mortgage purchases by the agencies boosts mortgage lending, in particular refinancing, and lowers mortgage rates. Agency purchases also influence prices in other asset markets, stimulate residential investment, and expand homeownership. We compare these effects to those of conventional monetary policy shocks, and we provide evidence on the interactions between housing credit and monetary policies.
This paper studies how the Hodrick-Prescott filter should be adjusted when changing the frequency of observations. It complements the results of Baxter and King (1999) with an analytical analysis, ...demonstrating that the filter parameter should be adjusted by multiplying it with the fourth power of the observation frequency ratios. This yields an HP parameter value of 6.25 for annual data given a value of 1600 for quarterly data. The relevance of the suggestion is illustrated empirically.
This paper evaluates the extent to which a DSGE model can account for the impact of tax policy shocks. We estimate the response of macroeconomic aggregates to anticipated and unanticipated tax shocks ...in the US and find that unanticipated tax cuts have persistent expansionary effects on output, consumption, investment and hours worked. Anticipated tax cuts give rise to contractions in output, investment and hours worked prior to their implementation, while stimulating the economy when implemented. We show that a DSGE model can account quite successfully for these findings. The main features of the model are adjustment costs, consumption durables, variable capacity utilization and habit formation.
We study the effects of fiscal policy interventions in a liquidity trap in a model with nominal rigidities and an interest rate rule. In a liquidity trap caused by a self-fulfilling state of low ...confidence, higher government spending has deflationary effects that reduce the spending multiplier when the zero lower bound is binding. Instead, cuts in marginal labour tax rates are inflationary and become more expansionary when the zero lower bound is binding. These findings contradict a popular view, based on a liquidity trap caused by a fundamental shock such as a taste shock, that higher government spending is inflationary and can therefore be associated with large multipliers at the zero lower bound, while lower marginal tax rates are deflationary and therefore counterproductive.
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