Understanding the aggregate effects of anticipated and unanticipated tax policy shocks

This paper evaluates the extent to which a DSGE model can account for the impact of tax policy shocks. We estimate the response of macroeconomic aggregates to anticipated and unanticipated tax shocks in the US and find that unanticipated tax cuts have persistent expansionary effects on output, consu...

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Bibliographic Details
Published in:Review of economic dynamics 2011, Vol.14 (1), p.27-54
Main Authors: Mertens, Karel, Ravn, Morten O.
Format: Article
Language:English
Subjects:
Anticipation effects
Applied general equilibrium models
Consumption
Economic impact analysis
Economic models
Economic shock
Fiscal policy
Output
Output rate
Structural estimation
Studies
Tax cuts
Tax rates
Tax shocks
U.S.A
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Summary:This paper evaluates the extent to which a DSGE model can account for the impact of tax policy shocks. We estimate the response of macroeconomic aggregates to anticipated and unanticipated tax shocks in the US and find that unanticipated tax cuts have persistent expansionary effects on output, consumption, investment and hours worked. Anticipated tax cuts give rise to contractions in output, investment and hours worked prior to their implementation, while stimulating the economy when implemented. We show that a DSGE model can account quite successfully for these findings. The main features of the model are adjustment costs, consumption durables, variable capacity utilization and habit formation.
ISSN:1094-2025
1096-6099
DOI:10.1016/j.red.2010.07.004