We assess whether the e˙ects of ˝scal policy depend on the extent of uncertainty in the economy. Focusing on tax shocks, identi˝ed by the narrative series by Romer and Romer (2010), and various measures of uncertainty, we use a Threshold VAR model to allow for dependence of the e˙ects of the tax shocks on both the level of uncertainty and the sign of the shock. We ˝nd that the economy responds more positively to tax cuts during periods of low uncertainty, while, in response to tax increases, the response of main aggregates is more negative in more uncertain times. We argue that controlling for monetary policy in ˝scal VARs is important to avoid omitted variable bias. We interpret our empirical evidence in light of existing theoretical contributions.
Tax shocks with high and low uncertainty
Marcellino Massimiliano
2019
Abstract
We assess whether the e˙ects of ˝scal policy depend on the extent of uncertainty in the economy. Focusing on tax shocks, identi˝ed by the narrative series by Romer and Romer (2010), and various measures of uncertainty, we use a Threshold VAR model to allow for dependence of the e˙ects of the tax shocks on both the level of uncertainty and the sign of the shock. We ˝nd that the economy responds more positively to tax cuts during periods of low uncertainty, while, in response to tax increases, the response of main aggregates is more negative in more uncertain times. We argue that controlling for monetary policy in ˝scal VARs is important to avoid omitted variable bias. We interpret our empirical evidence in light of existing theoretical contributions.File | Dimensione | Formato | |
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