The Analytics of SVARs: A Unified Framework to Measure Fiscal Multipliers

Do tax cuts and spending increases stimulate output? Studies that identify fiscal shocks using structural vector autoregressions (SVAR)have reached different conclusions. In this paper, we show analytically that this lack of consensus reflects different assumptions on the fiscal rules that—by relating tax and spending policies to macroeconomic conditions—determine the identification of fiscal shocks and the associated fiscal multipliers. We then propose a new identification strategy based on a proxy SVAR that uses non-fiscal instruments to directly estimate the parameters of the fiscal rules. We find that spending increases stimulate output more than tax cuts.

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