Hostname: page-component-cd9895bd7-dzt6s Total loading time: 0 Render date: 2024-12-25T05:43:52.320Z Has data issue: false hasContentIssue false
  • English
  • Français

TRACING THE ROLE OF FORESIGHT IN THE EFFECTS OF U.S. TAX POLICY: EVIDENCE FROM A TIME-VARYING STRUCTURAL VECTOR AUTOREGRESSION

Published online by Cambridge University Press:  19 October 2016

T. Philipp Dybowski
T. Philipp Dybowski*
Affiliation:
University of Muenster
*
Address correspondence to: T. Philipp Dybowski, University of Muenster, Universitaetstrasse 14–16, 48143 Muenster, Germany; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

Recent empirical research stresses the importance of foresight in tax policy analyses, because failing to model foresight adequately leads to two types of biases: a bias that relates to a mismatch of information sets in the presence of foresight, and one that arises when time variation in foresight is ignored. This paper incorporates tax foresight into a framework of time-varying structural vector autoregression models with stochastic volatility to account for both types of biases. This reveals the effects of changing degrees of tax foresight on U.S. tax policy. Two findings stand out: First, anticipated and unanticipated tax shocks show considerable time variations, suggesting that some tax reforms were more anticipated than others. Second, the time-varying bias reveals that tax foresight was higher during the 1980s and 1990s than during the 1960s and 1970s. The results compare well with the literature and find support in documented U.S. tax episodes.

Keywords

Fiscal MultiplierTax ExpectationsIdentified Vector AutoregressionsBayesian Estimation
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Issue 4 , June 2018 , pp. 754 - 778
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I thank Bernd Kempa, Philipp Adämmer, Jana Riedel, Samad Sarferaz, and one anonymous referee for helpful comments on earlier versions of this paper.

References

REFERENCES

Auerbach, A.J. (1989) Tax reform and adjustment costs: The impact on investment and market value. International Economic Review 30 (4), 939–962.CrossRefGoogle Scholar
Blanchard, O. and Perotti, R. (2002) An empirical characterization of the dynamic effects of changes in government spending and taxes on output. Quarterly Journal of Economics 117 (4), 1329–1368.CrossRefGoogle Scholar
Burnside, C., Eichenbaum, M., and Fisher, J.D. (2004) Fiscal shocks and their consequences. Journal of Economic Theory 115 (1), 89–117.CrossRefGoogle Scholar
Canova, F. (2007) Methods for Applied Macroeconomic Research. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Canova, F. and Ciccarelli, M. (2009) Estimating multicountry VAR models. International Economic Review 50 (3), 929–959.CrossRefGoogle Scholar
Carter, C.K. and Kohn, R. (1994) On Gibbs sampling for state space models. Biometrika 81 (3), 541–553.CrossRefGoogle Scholar
Del Negro, M. and Primiceri, G. (2013) Time-Varying Structural Vector Autoregressions and Monetary Policy: A Corrigendum. Federal Reserve Bank of New York staff reports 619.Google Scholar
Edelberg, W., Eichenbaum, M., and Fisher, J.D. (1999) Understanding the effects of a shock to government purchases. Review of Economic Dynamics 2 (1), 166–206.CrossRefGoogle Scholar
Eichenbaum, M. and Fisher, J.D.M. (2005) Fiscal policy in the aftermath of 9/11. Journal of Money, Credit and Banking 37 (1), 1–22.CrossRefGoogle Scholar
Fatás, A. and Mihov, I. (2001) The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence. CEPR discussion paper 2760.Google Scholar
Fernández-Villaverde, J., Guerrón-Quintana, P., Kuester, K., and Rubio-Ramirez, J. (2015) Fiscal volatility shocks and economic activity. American Economic Review 105 (11), 3352–3384.CrossRefGoogle Scholar
Fortune, P. (1996) Do municipal bond yields forecast tax policy? New England Economic Review (Sept), 29–48.Google Scholar
Fuller, W.A. (1996). Introduction to Statistical Time Series. Hoboken, NJ: Wiley.Google Scholar
Galí, J., Lopez-Salido, J.D., and Valls, J. (2007) Understanding the effects of government spending on consumption. Journal of the European Economic Association 5 (1), 227–270.CrossRefGoogle Scholar
Gerba, E. and Hauzenberger, K. (2013) Estimating US Fiscal and Monetary Interactions in a Time Varying VAR. London School of Economics discussion paper KDPE 1303.Google Scholar
Hall, R.E. (1971) The dynamic effects of fiscal policy in an economy with foresight. Review of Economic Studies 38 (2), 229–244.CrossRefGoogle Scholar
House, C.L. and Shapiro, M.D. (2006) Phased-in tax cuts and economic activity. American Economic Review 96 (5), 1835–1849.CrossRefGoogle Scholar
Judd, K.L. (1985) Short-run analysis of fiscal policy in a simple perfect foresight model. Journal of Political Economy 93 (2), 298–319.CrossRefGoogle Scholar
Kim, S., Shephard, N., and Chib, S. (1998) Stochastic volatility: Likelihood inference and comparison with ARCH models. Review of Economic Studies 65 (3), 361–393.CrossRefGoogle Scholar
Kirchner, M., Cimadomo, J., and Hauptmeier, S. (2010) Transmission of Government Spending Shocks in the Euro Area: Time Variation and Driving Forces. ECB working paper 1219.Google Scholar
Kueng, L. (2011) Tax News: Identifying the Household Consumption Response to Tax Expectations Using Bond Prices. Manuscript, University of California, Berkeley.Google Scholar
Leeper, E.M., Richter, A.W., and Walker, T.B. (2012) Quantitative effects of fiscal foresight. American Economic Journal: Economic Policy 4 (2), 115–144.Google Scholar
Leeper, E.M., Walker, T.B., and Yang, S.-C.S. (2013a) Fiscal foresight and information flows. Econometrica 81 (3), 1115–1145.Google Scholar
Leeper, E.M., Walker, T.B., and Yang, S.-C.S. (2013b) Supplement to “Fiscal foresight and information flows.” Econometrica 81 (3), 1115–1145.Google Scholar
Mertens, K. and Ravn, M.O. (2011) Understanding the aggregate effects of anticipated and unanticipated tax policy shocks. In Special Issue: Sources of Business Cycles, Review of Economic Dynamics 14 (1), 27–54.CrossRefGoogle Scholar
Mertens, K. and Ravn, M.O. (2012) Empirical evidence on the aggregate effects of anticipated and unanticipated US tax policy shocks. American Economic Journal: Economic Policy 4 (2), 145–181.Google Scholar
Mountford, A. and Uhlig, H. (2009) What are the effects of fiscal policy shocks? Journal of Applied Econometrics 24 (6), 960–992.CrossRefGoogle Scholar
Müller, U.K. (2012) Measuring prior sensitivity and prior informativeness in large Bayesian models. Journal of Monetary Economics 59 (6), 581–597.CrossRefGoogle Scholar
Park, S. (1997) The relationship between government financial condition and expected tax rates reflected in municipal bond yields. National Tax Journal 50 (1), 23–38.CrossRefGoogle Scholar
Pereira, M.C. and Lopes, A.S. (2014) Time-varying fiscal policy in the U.S. Studies in Nonlinear Dynamics and Econometrics 18 (2), 157–184.Google Scholar
Perotti, R. (2005) Estimating the Effects of Fiscal Policy in OECD Countries. CEPR discussion paper 4842.Google Scholar
Poterba, J.M. (1989) Tax reform and the market for tax-exempt debt. Regional Science and Urban Economics 19 (3), 537–562.CrossRefGoogle Scholar
Primiceri, G.E. (2005) Time varying structural vector autoregressions and monetary policy. Review of Economic Studies 72 (3), 821–852.CrossRefGoogle Scholar
Ramey, V.A. (2011) Identifying government spending shocks: It's all in the timing. Quarterly Journal of Economics 126 (1), 1–50.CrossRefGoogle Scholar
Ramey, V.A. and Shapiro, M.D. (1998) Costly capital reallocation and the effects of government spending. Carnegie-Rochester Conference Series on Public Policy 48, 145–194.CrossRefGoogle Scholar
Rathke, A. and Sarferaz, S. (2014) Malthus and the Industrial Revolution: Evidence from a Time-Varying VAR. CESifo working papers 4667.CrossRefGoogle Scholar
Yang, S.-C.S. (2005) Quantifying tax effects under policy foresight. Journal of Monetary Economics 52 (8), 1557–1568.CrossRefGoogle Scholar
Yang, S.-C.S. (2007) A Chronology Of Postwar U.S. Federal Income Tax Policy. Indiana University Bloomington Economics Department Center for Applied Economics and Policy Research (CAEPR) working paper 21.Google Scholar