Empirical Evidence: Methodological Issues Endogeneity of tax changes •Tax cuts potentially correlated with cycle •Estimated of the effects of counter- cyclical tax policy will be attenuated – Similar attenuation from monetary non- accommodation •Endogeneity could have opposite sign, e.g., tax cuts in strong economies – State and local tax cuts typically cyclical
35
Embed
Empirical Evidence: Methodological Issues Endogeneity of tax changes Tax cuts potentially correlated with cycle Estimated of the effects of counter-cyclical.
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Empirical Evidence:Methodological Issues
Endogeneity of tax changes
•Tax cuts potentially correlated with cycle
•Estimated of the effects of counter-cyclical tax policy will be attenuated
– Similar attenuation from monetary non-accommodation
•Endogeneity could have opposite sign, e.g., tax cuts in strong economies
• Tax changes very frequent– Every two years, on average
Narrative methodology: Issues
• Subjective judgment of motivation of policy change
Narrative methodology: Issues
• Timing very complicated– Proposed, often during campaigns– Formal introduction of legislation– Passage of legislation– Signing of legislation – Effective date of legislation
• Often retroactive
• Timing matters econometrically– Rudebusch on Federal Funds shocks– Ramey on military shocks
Narrative examples
Omnibus Budget Reconciliation Act of 1993
(Clinton tax increases)
Classification: Exogenous, Deficit-driven
Timing: Passed August 1993
•Not proposed in 1992 campaign
•Passage uncertain (one vote in House)
Narrative examples
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRA)
•Commonly used “cyclically adjusted revenue” also appears endogenous
Estimated response of GDP to a 1% of GDP, exogenous versus endogenous tax increase
Source: Romer and Romer, 2010.
Estimated response of GDP to a 1% of GDP, exogenous versus endogenous tax increase
Source: Romer and Romer, 2010.
Narrative approach: Evaluation
• Effective for separating endogenous and exogenous tax changes
• Very large tax cut multipliers– Larger than plausible parameterization of
Woodford-type model treating tax cuts as income effects
• Strong circumstantial case that price/allocative effects are large
• Substantial lags in effects
Narrative approach to spending shocks
Estimated Effects of Spending Shocks:Questions
1. What happens to real wage?– Old debate: Keynes-Dunlop-Tarshis
• Aggregate demand shocks move firms along the labor demand curve
• High aggregate demand leads to lower wages because of diminishing MPL
• Wages, however, do not appear to be countercyclical
– Modern evidence from micro• Wages procyclical (Bils, Solon-Barsky-Parker)
Estimated Effects of Spending Shocks:Questions
1. What happens to real wage?– Modern theory
• Markup falls in booms (Rotemberg-Woodford, Macro Annual)– Ramey-Shapiro variant: Less clear in 2 sector model
• Wages procyclical (essentially 1/markup)
– Use govt shocks to study exogenous movements in demand
Estimated Effects of Spending Shocks:Questions
2. What happens to GDP/Employment when spending increase?
– Return to issues of first lecture– Key questions for fiscal policy evaluation
Estimated Effects of Spending Shocks:Finding exogenous variation
• Narrative– Ramey-Shapiro military build-ups
• VAR– Blanchard-Perotti
• Instrumental variables (military)– Hall, Barro
Ramey-Shapiro military spending dates
• Narrative approach in the tradition of Romer and Romer
• Ramey-Shapiro Carnegie-Rochester (1998)– Includes 2-sector model
• Ramey QJE (2011, in press)– Updates, and comparison with VAR– Stresses timing effects
• A military shock is news about a long sequence of spending• VAR’s fragile with respect to timing issues
Korea (1950:3)
On June 25, 1950 the North Korean army launched a surprise invasion of South Korea, and on June 30, 1950 the U.S. Joint Chiefs of Staff unilaterally directed General MacArthur to commit ground, air, and naval forces. The July 1, 1950 issue of Business Week immediately predicted more money for defense. By August 1950, Business Week was predicting that defense spending would more than triple by fiscal year 1952.
Vietnam (1965:1)
Despite the military coup that overthrew Diem on November 1, 1963, Business Week was still talking about defense cuts for the next year (November 2, 1963, p. 38; July 11, 1964, p. 86). Even the Gulf of Tonkin incident on August 2, 1964 brought no forecasts of increases in defense spending. However, after the February 7, 1965 attack on the U.S. Army barracks, Johnson ordered air strikes against military targets in North Vietnam. The February 13, 1965, Business Week said that this action was “a fateful point of no return” in the war in Vietnam.
Carter-Reagan Buildup (1980:1)The Soviet invasion of Afghanistan on December 24, 1979 led to a significant turnaround in U.S. defense policy. The event was particularly worrisome because some believed it was a possible precursor to actions against Persian Gulf oil countries. The January 21, 1980 Business Week (p.78) printed an article entitled “A New Cold War Economy” in which it forecasted a significant and prolonged increase in defense spending. Reagan was elected by a landslide in November 1980 and in February 1981 he proposed to increase defense spending substantially over the next five years.
9/11 (2001:3)
On September 11, 2001, terrorists struck the World Trade Center and the Pentagon. On October 1, 2001, Business Week forecasted that the balance between private and public sectors would shift, and that spending restraints were going “out the window.” To recall the timing of key subsequent events, the U.S. invaded Afghanistan soon after 9/11. It invaded Iraq on March 20, 2003.