Title: Comparing tax and spending multipliers by controlling for monetary policy

Authors: Andrew J. Jalil

Addresses: Department of Economics, Occidental College, 1600 Campus Road, Los Angeles, CA 90041, USA

Abstract: This paper derives empirical estimates for aggregate tax and spending multipliers. To deal with endogeneity concerns, I employ a large sample of fiscal consolidations identified through the narrative approach. To control for monetary policy, I study the output effects of fiscal consolidations in countries where monetary authorities are constrained in their ability to counteract shocks because they are in either a monetary union (and hence, lack an independent central bank) or a liquidity trap. My empirical estimates suggest that for fiscal consolidations, the tax multiplier is larger than the spending multiplier. The estimated tax multiplier is large - on the order of 3, suggesting strongly negative effects of tax increases on output.

Keywords: fiscal multipliers; monetary policy; fiscal policy; tax increases; government spending cuts; endogeneity; fiscal consolidation.

DOI: 10.1504/IJEBR.2016.078815

International Journal of Economics and Business Research, 2016 Vol.12 No.1, pp.62 - 90

Received: 18 Feb 2016
Accepted: 27 May 2016
Published online: 02 Sep 2016 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article