Tax multipliers and monetary policy: Evidence from a threshold model |
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Authors: | Paul M. Jones Eric Olson |
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Affiliation: | 1. Department of Economics, Finance, and Legal Studies, Culverhouse College of Commerce & Business Administration, University of Alabama, Tuscaloosa, AL 35487-0024, United States;2. College of Business and Economics, West Virginia University, 1601 University Avenue, Morgantown, WV 26506, United States |
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Abstract: | Romer and Romer (2010) use the narrative record to generate a time series of exogenous shocks to fiscal policy. They report a tax multiplier of 3.0. We extend their analysis and allow for nonlinearities between their shocks and the effects on output by estimating a threshold regression model. Using Hansen’s (1997) procedure, we find the best fitting threshold is changes in the federal fund rate with a delay of two quarters. Moreover, we find that the tax multiplier is approximately 4.3 if accompanied by an accommodative monetary policy and approximately 1.2 under tight monetary policy. |
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Keywords: | Threshold model Tax multiplier Monetary policy |
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