# 1 Introduction

After the 2007-2008 Global Financial Crisis, ...scal multipliers –the e¤ects of ...scal policy on aggregate output – have taken center stage in the policy world. Motivated early on by the policy focus on ...scal stimulus (to counter the economic recession that followed the crisis) and, more recently, by ...scal consolidation (due to increasing concerns about debt sustainability) studies estimating government spending multipliers and, to a lesser extent, tax multipliers have ‡ourished.

The main challenge and point of contention among researchers has been how to address the possible endogeneity of ...scal policy or, put di¤erently, how to identify exogenous ...scal policy shocks (i.e., changes in ...scal policy variables that are not directly or indirectly related to output changes). On the taxation front, which is the focus of this paper, there is an emerging consensus in the literature that the so-called narrative approach developed by Romer and Romer (2010) (henceforth RR) in their study of the United States is better suited to identifying exogenous tax policy shocks than the traditional approach pioneered by Blanchard and Perotti (2002) (hereafter BP). The BP approach imposes short-term restrictions in the context of structural vector autoregressions (SVAR). While changes in tax policy are allowed to contemporaneously a¤ect output, it is assumed that it takes the government at least one quarter to respond to developments in the state of the economy. While appealing at ...rst sight, this timing identifying strategy has been criticized on the basis that most changes in ...scal policy, including tax changes, are actually anticipated by agents (e.g., Ramey and Shapiro, 1998; Leeper, Walker, and Yang, 2008; Ramey, 2011; Auerbach and Gorodnichenko, 2012a; and Riera-Crichton, Vegh, and Vuletin, 2016). Moreover, and especially for large and sudden falls in output, it is not obvious that within-the-quarter economic developments do not a¤ect tax policy. For example, during episodes of natural disasters, it is often the case that governments quickly respond by increasing or reducing taxes. The earthquakes in Ecuador (2016), Japan (2011), India (2001), and California (1989) are clear examples of the unsuitability of the BP timing assumption as tax responses occurred within 26, 47, 6, and 18 days following the earthquakes, respectively.<sup>1</sup> See, Chahrour, Schmitt-Grohe, and Uribe (2012) for a model-based evaluation of the implications of using SVAR vis-à-vis the narrative approach relying on a DSGE model.

In contrast, RR use narrative records, from Congressional reports to presidential speeches, to identify the principal motivation behind all major postwar tax policy actions in the U.S. The analysis of contemporaneous records enables RR to separate legislated tax changes into those enacted for reasons related to current or prospective economic conditions (i.e., endogenous to the business cycle) from those taken for reasons exogenous to the business cycle, including those motivated by long-run growth considerations (e.g., by a belief that lower taxes will raise output in the long run) and inherited de...citdriven tax changes (which re‡ect past economic conditions and budgetary decisions, not current or

> 1 See Appendix 1 for more details about the nature of these earthquakes, e¤ects on GDP, as well as the tax policy responses.

2