Output, Employment, and Price Effects of U.S. Narrative Tax Changes: A Factor-Augmented Vector Autoregression Approach

This paper examines the short- and long-run effects of U.S. federal personal income corporate tax cuts on a wide array economic policy variables in data-rich environment. Using panel macroeconomic data set, made up 132 quarterly series for 1959-2018, study estimates factor-augmented vector autoregression (FAVARs) models where an extended narrative changes dataset combined with unobserved factors. The approach classifies if are exogenous or endogenous. identifies shocks model using sign restrictions Uhlig's (2005) penalty function. Empirical findings show significant expansionary effect variables. Cuts taxes cause rise output, investment, employment, consumption; however, appear to be more effective fiscal tool than cut taxes. Real GDP, industrial production increase significantly reach their maximum response values two years after cuts. have relatively smaller output consumption but immediate higher fixed investment price levels.