Comparing tax and spending multipliers by controlling for monetary policy
by Andrew J. Jalil
International Journal of Economics and Business Research (IJEBR), Vol. 12, No. 1, 2016

Abstract: This paper derives empirical estimates for aggregate tax and spending multipliers. To deal with endogeneity concerns, I employ a large sample of fiscal consolidations identified through the narrative approach. To control for monetary policy, I study the output effects of fiscal consolidations in countries where monetary authorities are constrained in their ability to counteract shocks because they are in either a monetary union (and hence, lack an independent central bank) or a liquidity trap. My empirical estimates suggest that for fiscal consolidations, the tax multiplier is larger than the spending multiplier. The estimated tax multiplier is large - on the order of 3, suggesting strongly negative effects of tax increases on output.

Online publication date: Fri, 02-Sep-2016

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