Department of Economics and Business Economics

Olaf Posch

Explaining output volatility: The case of taxation

Research output: Working paperResearch

  • School of Economics and Management
This paper studies the effects of taxation on output volatility in OECD countries
to shed light on the sources of observed heterogeneity over time and across countries.
To this end, we derive tax effects on macro aggregates in a stochastic neoclassical
model. As a result, taxes are shown to affect the second moment of output growth
rates without (long-run) effects on the first moment. Taking the model to the data,
we exploit observed heterogeneity patterns to estimate effects of tax rates on macro
volatility using panel estimation, explicitly modeling the unobserved variance process.
We find a strong empirical link between e ective tax rates and output volatility, with
some evidence of a cointegrating relationship. In accordance with theory, taxes on
labor income and corporate income empirically are found to be negatively related to
volatility of macro aggregates whereas the capital tax ratio has positive effects.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages73
Publication statusPublished - 2008

    Research areas

  • Macroeconomic volatility; Tax effects; Big moderation

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ID: 10026620