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Explaining Business Cycle Fluctuations. Is there a Role for Anticipated Tax Shocks?

Pfeifer, Johannes
Born, Benjamin
Peter, Alexandra
Year of Publication: 
Series/Report no.: 
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2010: Ökonomie der Familie - Session: Fiscal Policy and the Business Cycle E6-V1
Yes, there is! We use an RBC model featuring contemporaneous and anticipated shocks to total factor productivity, investment-specific technology growth, and government spending and augment it by including distortionary capital and labor taxation. The model is then estimated using Bayesian methods in order to identify the relative importance of the individual shocks for macroeconomic fluctuations. We find that stationary and nonstationary technology shocks combined explain more than half of output variance and almost 80% of the variance of hours. Tax liability shocks are identified to be the second most important driver of business cycles, explaining 43% of output variance. The largest variance contribution is due to anticipated capital tax shocks, indicating that fiscal foresight cannot be neglected. Capital tax shocks are even more important in accounting for the behavior of investment. Labor tax shocks only play a minor role for GDP fluctuations, but are instrumental in explaining the behavior of hours. The spending side of the fiscal sector plays a negligible role for output fluctuations around its trend as do investment-specific productivity shocks.
Anticipated Tax Shocks
Sources of Aggregate Fluctuations
Bayesian Estimation
Document Type: 
Conference Paper

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