Measuring Tax Multipliers: The Narrative Method in Fiscal VARs

Carlo Favero, Francesco Giavazzi
2012 American Economic Journal: Economic Policy  
This paper argues in favour of empirical models built by including in fiscal VAR models structural shocks identified via the narrative method. We first show that "narrative" shocks are orthogonal to the relevant information set a fiscal VAR. We then derive impulse responses to these shocks. The use of narrative shocks does not require the inversion of the moving-average representation of a VAR for the identification of the relevant shocks. Therefore, within this framework, fiscal multipliers
more » ... be identified and estimated even when, in the presence of "fiscal foresight", the MA representation of the VARs is not invertible.
doi:10.1257/pol.4.2.69 fatcat:szoewduvrzflxln5a22sigucfu