A1134
Title: Macroeconomic effects of different tax policies: Narrative evidence from Canada
Authors: Daniela Hauser - Bank of Canada (Canada) [presenting]
Rodrigo Sekkel - Bank of Canada (Canada)
Dmitry Matveev - University of Mannheim (Germany)
Aaron Leonard - University of Chicago (United States)
Abstract: The pandemic has underlined the importance of understanding the effect of specific fiscal instruments, and the need to offer guidance for judging the relative merits of different types of fiscal instruments. Estimating the effects of tax changes on economic activity poses a significant empirical challenge because observed tax changes are rare, discrete events whose motivations are often correlated with other drivers of short-term economic activity. While there are different approaches to identifying exogenous changes to federal taxes, one increasingly popular way to overcome the identification challenges is to use a narrative approach based on a wide variety of historical documents. A new narrative dataset is constructed for legislated changes to taxes on personal income, corporate income and consumption in Canada to analyze how these fiscal-policy changes affects the economy and public finances. Specifically, light is shed on which tax cuts stimulate the economy, and which tax increases harm economic recovery. Finally, we will discuss the implications of our empirical findings for theoretical models.
