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Tax shocks with high and low uncertainty
Author(s) -
Bertolotti Fabio,
Marcellino Massimiliano
Publication year - 2019
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2723
Subject(s) - economics , romer , shock (circulatory) , sign (mathematics) , fiscal policy , econometrics , tax policy , macroeconomics , monetary economics , tax reform , public economics , medicine , mathematical analysis , cartography , mathematics , geography
Summary We assess whether the effects of fiscal policy depend on the extent of uncertainty in the economy. Focusing on tax shocks, identified by the narrative series by Romer and Romer (American Economic Review, 2010, 100(3), 763‐801), and various measures of uncertainty, we use a Threshold VAR model to allow for dependence of the effects of the tax shocks on both the level of uncertainty and the sign of the shock. We find 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 fiscal VARs is important to avoid omitted variable bias. We interpret our empirical evidence in light of existing theoretical contributions.