DGSB - Research News
A factor-augmented VAR approach: The effect of a rise in the US personal income tax rate on the US and Canada
Professor Pasquale Sgro and Dr Gianluca Lagana
In a paper recently published in Economic Modelling (28) 2011, pp. 1163-9, Professor Pasquale Sgro and his colleague Dr Gianluca Lagana (Ministry of Economics and Finance & CREI University of Roma Tre, Italy) estimate a factor-augmented vector autoregressive (FAVAR) model to characterise the dynamic effects of shocks in the personal income tax rate in the United States (US) and Canada.
The representation and the estimate of the FAVAR model is based on Stock & Watson (2005). The shocks are recovered applying the identification scheme proposed by Bernanke et al. (2005). This allows impulse response functions to be generated for all variables in the dataset and provides a description of the domestic and international transmission mechanisms of US movements in personal income tax rate.
A distinguishing feature of Sgro and Lagana's model is the disaggregation of traded goods sector where imports and exports are disaggregated into 12 and 13 industries, respectively. This provides extra information on the domestic and international transmission mechanism across two countries.
The results of Professor Sgro and Dr Lagana's estimation show that the FAVAR approach generates a reasonable characterisation of the effects of movements in the US personal income tax rate on the US economy and its transmission to the Canadian economy.
The journal Economic Modelling is ERA listed and is A-ranked in the ABDC list. The paper can be accessed at the Economic Modelling Journal.
