Measuring Tax Multipliers: The Narrative Method in Fiscal VARs

This paper argues in favor 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 can be identified and estimated even when, in the presence of “fiscal foresight,” the MA representation of the VARs is not invertible. (JEL C32, E62, H20, H62, H63)