EconStor >
Federal Reserve Bank of New York >
Staff Reports, Federal Reserve Bank of New York >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/60832
  
Title:A Bayesian approach to estimating tax and spending multipliers PDF Logo
Authors:Denes, Matthew
Eggertsson, Gauti B.
Issue Date:2009
Series/Report no.:Staff Report, Federal Reserve Bank of New York 403
Abstract:This paper outlines a simple Bayesian methodology for estimating tax and spending multipliers in a dynamic stochastic general equilibrium (DSGE) model. After forming priors about the parameters of the model and the relevant shock, we used the model to exactly match only one data point: the trough of the Great Depression, that is, an output collapse of 30 percent, deflation of 10 percent, and a zero short-term nominal interest rate. Because we form our priors as distributions, the key economic inference of our analysis - the multipliers of tax and spending - are well-defined probability distributions derived from the posterior of the model. While the Bayesian methods used are standard, the application is slightly unusual. We conjecture that this methodology can be applied in several different settings with severe data limitations and where more informal calibrations have been the norm. The main advantage over usual calibration exercises is that the posterior of the model offers an interesting way to think about sensitivity analysis and gives researchers a useful way to describe model-based inference. We apply our simple estimation method to the American Recovery and Reinvestment Act (ARRA), passed by Congress as part of the 2009 stimulus plan. The mean of our estimate indicates that ARRA increased output by 3.6 percent in 2009 and 2010. The standard deviation of this estimate is 1 percent.
Subjects:Tax and spending multipliers
zero interest rates
deflation
JEL:E52
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

Files in This Item:
File Description SizeFormat
622792253.pdf340.34 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/60832

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.