We test whether output responds symmetrically to exogenous tax increases (“positive” shock) and d... more We test whether output responds symmetrically to exogenous tax increases (“positive” shock) and decreases (“negative” shock) in postwar US (quarterly) data using the identification in Romer and Romer (2010). Our key results point towards significant asymmetry: output responds insignificantly to a tax increase, but shows a significantly positive and permanent response to a tax decrease. Further analysis reveals that our result of asymmetric responses of output to positive and negative tax shock is driven by individual income tax shocks. Output responds symmetrically to corporate income tax shocks but asymmetrically to individual income tax shocks. Additionally, responses of other macroeconomic variables to these tax shocks also reveal that the asymmetric response of output is transmitted to the economy through an asymmetric consumption response to tax shocks.
We study whether output responds symmetrically to tax increases and decreases in postwar US data,... more We study whether output responds symmetrically to tax increases and decreases in postwar US data, using the identification strategy in Romer and Romer (2010). We find evidence of important asymmetries: the output response to a tax increase is statistically insignificant, but output shows a significantly positive and permanent increase following a tax decrease. We show that this asymmetry appears to be driven by individual-income tax changes, and is transmitted to the economy through asymmetric response in aggregate consumption to tax increases and tax decreases. We also present a simple model that rationalizes our empirical findings, and illustrates how asymmetric output and consumption responses to sign-based tax changes can be generated by plausible consumption-adjustment costs.
In evaluating an economic model with Structural Vector Auto-Regression (SVAR), the Cogley-Nason-S... more In evaluating an economic model with Structural Vector Auto-Regression (SVAR), the Cogley-Nason-Sims (CNS) approach compares impulse responses estimated from empirical data with those obtained from the identical SVAR run on model generated data. Using Monte-Carlo simulations, this paper examines small sample performance of the CNS approach.
We study whether output responds symmetrically to tax increases and decreases in postwar US data,... more We study whether output responds symmetrically to tax increases and decreases in postwar US data, using the identification strategy in Romer and Romer (2010). We find evidence of important asymmetries: the output response to a tax increase is statistically insignificant, but output shows a significantly positive and permanent increase following a tax decrease. We show that this asymmetry appears to be driven by individual-income tax changes, and is transmitted to the economy through asymmetric response in aggregate consumption to tax increases and tax decreases. We also present a simple model that rationalizes our empirical findings, and illustrates how asymmetric output and consumption responses to sign-based tax changes can be generated by plausible consumption-adjustment costs.
Kehoe (2007) advocates that in evaluating an economic model, the Sims-Cogley-Nason (SCN) approach... more Kehoe (2007) advocates that in evaluating an economic model, the Sims-Cogley-Nason (SCN) approach should be adopted in which empirical impulse responses are compared to those obtained from the identical structural VAR run on model generated data of the same length as actual observations. This paper examines, using Monte Carlo simulation, finite sample properties of the SCN approach. Throughout the paper, we use the simple textbook New-Keynesian model as data generating process, and focus on effects of the identified monetary shocks, derived by structural VAR with shortrun identification assumption. We find that when the model violates the identifying restriction and monetary shocks are misidentified, the SCN approach has poor small sample performance. We show that: 1) The estimated impulse responses are biased and uninformative; 2) The parameter estimates derived by matching impulse responses are biased and with large mean square error. Ironically, the very reason calling for the SCN approach-misidentification, is also the cause for its poor finite sample performance.
We test whether output responds symmetrically to exogenous tax increases (“positive” shock) and d... more We test whether output responds symmetrically to exogenous tax increases (“positive” shock) and decreases (“negative” shock) in postwar US (quarterly) data using the identification in Romer and Romer (2010). Our key results point towards significant asymmetry: output responds insignificantly to a tax increase, but shows a significantly positive and permanent response to a tax decrease. Further analysis reveals that our result of asymmetric responses of output to positive and negative tax shock is driven by individual income tax shocks. Output responds symmetrically to corporate income tax shocks but asymmetrically to individual income tax shocks. Additionally, responses of other macroeconomic variables to these tax shocks also reveal that the asymmetric response of output is transmitted to the economy through an asymmetric consumption response to tax shocks.
We study whether output responds symmetrically to tax increases and decreases in postwar US data,... more We study whether output responds symmetrically to tax increases and decreases in postwar US data, using the identification strategy in Romer and Romer (2010). We find evidence of important asymmetries: the output response to a tax increase is statistically insignificant, but output shows a significantly positive and permanent increase following a tax decrease. We show that this asymmetry appears to be driven by individual-income tax changes, and is transmitted to the economy through asymmetric response in aggregate consumption to tax increases and tax decreases. We also present a simple model that rationalizes our empirical findings, and illustrates how asymmetric output and consumption responses to sign-based tax changes can be generated by plausible consumption-adjustment costs.
In evaluating an economic model with Structural Vector Auto-Regression (SVAR), the Cogley-Nason-S... more In evaluating an economic model with Structural Vector Auto-Regression (SVAR), the Cogley-Nason-Sims (CNS) approach compares impulse responses estimated from empirical data with those obtained from the identical SVAR run on model generated data. Using Monte-Carlo simulations, this paper examines small sample performance of the CNS approach.
We study whether output responds symmetrically to tax increases and decreases in postwar US data,... more We study whether output responds symmetrically to tax increases and decreases in postwar US data, using the identification strategy in Romer and Romer (2010). We find evidence of important asymmetries: the output response to a tax increase is statistically insignificant, but output shows a significantly positive and permanent increase following a tax decrease. We show that this asymmetry appears to be driven by individual-income tax changes, and is transmitted to the economy through asymmetric response in aggregate consumption to tax increases and tax decreases. We also present a simple model that rationalizes our empirical findings, and illustrates how asymmetric output and consumption responses to sign-based tax changes can be generated by plausible consumption-adjustment costs.
Kehoe (2007) advocates that in evaluating an economic model, the Sims-Cogley-Nason (SCN) approach... more Kehoe (2007) advocates that in evaluating an economic model, the Sims-Cogley-Nason (SCN) approach should be adopted in which empirical impulse responses are compared to those obtained from the identical structural VAR run on model generated data of the same length as actual observations. This paper examines, using Monte Carlo simulation, finite sample properties of the SCN approach. Throughout the paper, we use the simple textbook New-Keynesian model as data generating process, and focus on effects of the identified monetary shocks, derived by structural VAR with shortrun identification assumption. We find that when the model violates the identifying restriction and monetary shocks are misidentified, the SCN approach has poor small sample performance. We show that: 1) The estimated impulse responses are biased and uninformative; 2) The parameter estimates derived by matching impulse responses are biased and with large mean square error. Ironically, the very reason calling for the SCN approach-misidentification, is also the cause for its poor finite sample performance.
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