The Macroeconomic Effects of Tax Changes: Evidence from Southern European Regions

Osti, Davide (2013): The Macroeconomic Effects of Tax Changes: Evidence from Southern European Regions.

Abstract

An original panel dataset of exogenous fiscal shocks for some Mediterranean countries is used along with the so-called "narrative" approach introduced by Romer and Romer (2010) to estimate the tax multiplier. Exogenous shocks comprise only tax changes motivated by the willingness to improve long term growth, reduce government debt as well as achieving redistributive goals. Endogenous shocks are excluded from the data since they are likely to be correlated with output. The aggregate tax multiplier on output is much smaller than the one found in Romer and Romer (2010): -1, instead of -3 at a three years perspective. When considering the effect of tax changes on unemployment, a multiplier of +2.8 is found on a two years horizon; a similar coefficient, with a negative sign, is found relating government tax liabilities with private investment, on the same temporal horizon. Splitting the sample between pre and post-crisis period, a multiplier non significantly different than zero is obtained for the first partition, while significant and equal to -0.75 for the second subsample.

• Item Type: MPRA Paper
• English Title: Fiscal Multipliers in the Euro Area: Evidence from Southern European Regions
• Language: English
• Keywords: exogenous fiscal shocks, GDP growth, unemployment, private investment, tax multipliers, policy lags
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General

References

[1] Acconcia, A., G. Corsetti, S. Simonelli (2011): Mafia and Public Spending: Evidence on the Fiscal Multiplier from a Quasi-Experiment, CSEF Working Paper, no. 281. [2] Alesina, Alberto, Silvia Ardagna (2012): The Design of Fiscal Adjustments, NBER Working Paper No. 18423. [3] Alesina, Alberto, Carlo Ambrogio Favero, Francesco Giavazzi (2012): The Output Effect of Fiscal Consolidations, GRASP Working Paper Project No. 450. [4] Barro, Robert J. Charles J. Redlick (2011): Macroeconomic Effects from Government Purchases and Taxes, Quarterly Journal of Economics Volume 126, 51- 102, Issue 1. [5] Baxter, Marian, Robert G. King (1993): Fiscal Policy in General Equilibrium, American Economic Review, Volume 82, pp. 315-334, Issue 3. [6] Blanchard, Jean Olivier, Daniel Leigh (2013): Growth Forecast Errors and Fiscal Multiplier, IMF Working Paper, no. 13/1. [7] Blanchard, Jean Olivier, Roberto Perotti (2002): An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output, Quarterly Journal of Economics, Volume 117, 1329-1368, Issue 4. [8] Cloyne, James (2011): What Are the Effects of Tax Changes in the United Kingdom? New Evidence from a Narrative Evaluation, CESIFO Working Paper No. 3433. [9] Corsetti, Giancarlo, Andre Meier, Gernot J. Muller (2012): What Determines Government Spending Multipliers, IMF Working Paper No.12/250. [10] Devriers, Pete, Jaime Guajardo, Daniel Leigh, Andrea Pescatori (2011): A New Action-Based Dataset of Fiscal Consolidation, IMF Working Paper No. 11/128. [11] Favero, Ambrogio Carlo, Francesco Giavazzi (2011): Reconciling VAR-based and Narrative Measures of the Tax Multiplier, American Economic Journals: Economic Policy, forthcoming. [12] Favero, Ambrogio Carlo , Francesco Giavazzi, Jacopo Perego (2011): Country Heterogeneity in the International Evidence of Fiscal Policy, IMF Economic Review, Palgrave Macmillan, Volume 59, pp.652-682, Issue 4. [13] Fazzari, Steven M.,R. Glenn Hubbard, Bruce C. Petersen (1988): Financing Constraints and Corporate Investment, Brookings Papers on Economic Activity pp. 141-95, Issue 1. [14] Guichard, Stéphanie, Michael Kennedy, Eckhard Wurzel, Christophe André (2007): What Promotes Fiscal Consolidation: OECD Countries Experiences, OECD Economics Department Working Paper No. 553 2007(13). [15] Guajardo, Jaime, Daniel Leigh, Andrea Pescatori (2011): Expansionary Austerity: New International Evidence., IMF Working Paper No. 11/158. [16] Hall, Robert E. (2011): By How Much Does GDP Rise if the Government Buys More Output?, Brookings Papers on Economic Activity, Issue Fall, pp. 183-236. [17] Hall, George J., Thomas J. Sargent (2011): Interest Rate Risk and Other Determinants of Post-WWII U.S. Government Debt/GDP Dynamics, American Economic Journals: Macroeconomics, Volume 3, pp. 1-27, Issue 3. [18] Ilzetzki, Ethan, Enrique G. Mendoza, Carlos A. Végh (2010): How Big (Small) Are Fiscal Multipliers?, NBER Working Paper No. 16479. [19] King, Robert G., Charles I. Plosser,Sergio T. Rebelo (1988): Production, Growth and Business Cycles: The Basic Neoclassical Model, Journal Of Monetary Economics, Volume 21, pp. 195-232, Issue 3. [20] Kraay, Aart. (2011): How Large is the Government Spending Multiplier? Evidence form World Bank Lending, Working Paper, World Bank. [21] Leeper, Eric M., Nora Traum, Todd B. Walker (2011): Clearing Up the Fiscal Multiplier Morass, NBER Working Paper No. 17444. [22] Metens, Karel, Morten O. Ravn (2010): Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks, Review of Economic Dynamics, forthcoming. [23] Mountford, Andrew, Harald Uhlig (2009): What Are the Effects of Fiscal Policy Shocks?, Journal of Applied Econometrics, Volume 24, pp. 960-992, Issue 6. [24] Nakamura, Emi, Jón Steinssón (2012): Fiscal Stimulus in a Monetary Union: Evidence form US Regions, American Economic Review, forthcoming. [25] Nekarda, Christopher J., Valerie A. Ramey (2011): Industry Evidence on the Effects of Government Spending, American Economic Journals: Macroeconomics, Volume 3, pp. 36-59, Issue 1. [26] Perotti, Roberto (2011): The Austerity Myth: Gain Without Pain?, IGIERWorking Paper No. 17571. [27] Perotti, Roberto (2011): Expectations and Fiscal Policy: An Empirical Investigation, European Commission Seventh Research Framework Program, project No. 244725. [28] Ramey, Valerie A. (2012): Government Spending and Private Activity, NBER Working Paper no. 17787. [29] Romer, Christina D., David H. Romer (2010): The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks, American Economic Review, Volume 100, pp. 765-801, Issue 3. [30] Sims, Christopher A. (1994): A Simple Model for Study the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy, Economic Theory, Volume 4, pp 381-399, Issue 4. [31] Trabandt, Mathias, Harald Uhlig (2006): How Far Are We From the Slippery Slope?, Humboldt University, SFB 649 Discussion Paper ’06-023.