Tax shocks with high and low uncertainty

Abstract

Summary We assess whether the effects of fiscal policy depend on the extent of uncertainty in the economy. Focusing on tax shocks, identified by the narrative series by Romer and Romer (American Economic Review, 2010, 100(3), 763‐801), and various measures of uncertainty, we use a Threshold VAR model to allow for dependence of the effects of the tax shocks on both the level of uncertainty and the sign of the shock. We find that the economy responds more positively to tax cuts during periods of low uncertainty, while, in response to tax increases, the response of main aggregates is more negative in more uncertain times. We argue that controlling for monetary policy in fiscal VARs is important to avoid omitted variable bias. We interpret our empirical evidence in light of existing theoretical contributions.

Government spending multipliers in (un)certain times

“…This result is consistent with the theoretical predictions and it suggests that the level of uncertainty in the economy significantly influences the effectiveness of government spending policy. It adds to evidence highlighting that more disagreement amongst US professional forecasters about future government spending, or higher stock market volatility, reduces the impact of recursively identified fiscal spending innovations (Ricco et al, 2016, Alloza, 2017, and that higher macroeconomic uncertainty lowers the effectiveness of narratively identified tax shocks (Bertolotti and Marcellino, 2017). Moreover, it rationalizes our finding of an average multiplier above one as the generalized model attaches larger weight to the more precisely estimated larger multiplier of the low volatility regime.…”

Nonlinear Effects of Economic Policy Uncertainty Shocks on Carbon Emissions in China: Evidence from Province-Level Data

“…We argue that the reason behind the above empirical phenomenon is strongly related to the transmission channels through which EPU shocks affect carbon emissions, as described in past relevant studies, and thus the nonlinear effects caused by EPU shocks on carbon emissions at the provincial level in China are mainly due to the differences in their economic and policy effects. Specifically, in terms of economic effects, EPU not only affects policy effectiveness but can also have a nonlinear effect on economic growth [ 36 , 37 , 38 ]; based on this, when the EPU is low or declining, the provincial economy grows rapidly due to, for example, increased policy effectiveness [ 39 ], which has a pulling effect on carbon emissions; conversely, an increase in EPU ultimately has a dampening effect on carbon emissions by inhibiting economic growth dynamics and thus reducing energy consumption. In terms of policy effects, the emission reduction effect of environmental regulation is more effective when EPU is low, but when EPU is high, local governments focus more on stabilizing economic development and overcoming the adverse effects of economic fluctuations, the intensity of environmental regulation may be relaxed, and the emission reduction effect of environmental regulation is weakened or even ineffective.…”

Measuring International Uncertainty Using Global Vector Autoregressions with Drifting Parameters

“…1 An incomplete survey of related contributions includes Caldara et al (2016); Basu and Bundick (2017); Fajgelbaum et al (2017); Schaal (2017); Bloom et al (2018); Alessandri and Mumtaz (2019); Bertolotti andLudvigson et al (2019). 2 JLN uncertainty measures are available online on the website of Sydney Ludvigson: sydneyludvigson.com.…”