A Bayesian Approach to Estimating Tax and Spending Multipliers

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper outlines a simple Bayesian methodology for estimating tax and spending multipliers in a dynamic stochastic general equilibrium (DSGE) model. After forming priors about the parameters of the model and the relevant shock, we used the model to exactly match only one data point: the trough of the Great Depression, that is, an output collapse of 30 percent, deflation of 10 percent, and a zero short-term nominal interest rate. Because we form our priors as distributions, the key economic inference of our analysis-the multipliers of tax and spending-are well-defined probability distributions derived from the posterior of the model. While the Bayesian methods used are standard, the application is slightly unusual. We conjecture that this methodology can be applied in several different settings with severe data limitations and where more informal calibrations have been the norm. The main advantage over usual calibration exercises is that the posterior of the model offers an interesting way to think about sensitivity analysis and gives researchers a useful way to describe model-based inference. We apply our simple estimation method to the American Recovery and Reinvestment Act (ARRA), passed by Congress as part of the 2009 stimulus plan. The mean of our estimate indicates that ARRA increased output by 3.6 percent in 2009 and 2010. The standard deviation of this estimate is 1 percent.

Deficits, Public Debt Dynamics, and Tax and Spending Multipliers

“…Before getting there, however, it is helpful to parameterize the model in order to translate our closed-form solutions into numerical examples. To do this, we parameterize the model using Bayesian methods described in better detail in Denes and Eggertsson (2009) . We illustrate two baseline examples but we choose the parameters and the shock to match two "scenarios."…”

“…The posterior is approximated numerically by the Metropolis algorithm and is derived in Denes and Eggertsson (2009). Table 2 shows the mode of the posterior for the two scenarios along with the priors.…”

Deficits, Public Debt Dynamics and Tax and Spending Multipliers

“…Recall that the shock, , is only driven by a shift in the preference parameter and has the interpretation of being the short‐term real interest rate if all prices were flexible. We use the same priors as in Denes and Eggertsson (). The posterior is approximated numerically by the Metropolis algorithm and is derived explicitly in Denes and Eggertsson ().…”

“…We see that this is the case, despite the fact that the priors chosen for the calibration are not very tight (see Table ). The main reason for this tight interval is that the ‘scenario’ we choose, that is the Great Depression and the Great Recession, puts relatively strong restriction on the model, so that conditional on matching these scenarios, the prediction of the model is relatively sharp as further discussed in Denes and Eggertsson (). This is in contrast to many other studies that do not impose as strong a restriction on what the model is supposed to generate as a benchmark.…”

Federal budget as a source of the Russian economy's growth: Financial reserves and opportunities

“…(The probability that any firm will reconsider its price in any period is assumed to be independent of the time since it last reconsidered its price, and of how high or low its current price may be.) To a log-linear approximation, 14 the optimal price p * t chosen by each firm that reconsiders 14 Here I log-linearize around the zero-inflation steady state, which under the assumed monetary its price in period t will be given by…”