The Economic Impact of Taxes in the US: Some Tests Based on the St. Louis Model

Abstract

The primary purpose of this article is to investigate empirically for the US the potential impact of monetary and fiscal policy upon real economic activity using the “St. Louis equation” approach. Only lagged values of the policy variables are included in the estimation to ensure their statistical exogeneity. Hsiao's (1981) multivariate technique is employed to determine the model lag specification. The empirical results suggest that only fiscal policy as measured by high‐employment tax changes can exert a significant lasting impact upon real GNP. Monetary policy, on the other hand, has only a temporary effect on real GNP. The results also show that both monetary and fiscal policy have significant and permanent effects on nominal GNP, the former via its permanent effect on prices and the latter through its permanent effect on real GNP.