Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/108875 
Year of Publication: 
2015
Series/Report no.: 
SAFE Working Paper No. 93
Publisher: 
Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe, Frankfurt a. M.
Abstract: 
A number of recent studies regress a "narratively" identified measure of a macroeconomic shock directly on an outcome variable. In this note, we argue that this approach can be viewed as the reduced-form regression of an instrumental variable approach in which the narrative time series is used as an instrument for an endogenous series of interest. This motivates evaluating the validity of narrative measures through the lens of a randomized experiment. We apply our framework to four recently constructed narrative measures of tax shocks by Romer and Romer (2010), Cloyne (2013), and Mertens and Ravn (2012). All of them turn out to be weak instruments for observable measures of taxes. After correcting for weak instruments, we find that using any of the considered narrative tax measures as an instrument for cyclically adjusted tax revenues yields tax multiplier estimates that are indistinguishable from zero. We conclude that the literature currently understates the uncertainty associated with quantifying the tax multiplier.
Subjects: 
Narrative Approach
Fiscal Stabilization
Tax Multiplier
Weak Instruments
JEL: 
E62
H30
E69
C54
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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