Different proxy variables used in fiscal policy SVARs lead to contradicting
conclusions regarding the size of fiscal multipliers. In this paper, we show
that the conflicting results are due to violations of the exogeneity
assumptions, i.e. the commonly used proxies are endogenously related to the
structural shocks. We propose a novel approach to include proxy variables into
a Bayesian non-Gaussian SVAR, tailored to accommodate potentially endogenous
proxy variables. Using our model, we show that increasing government spending
is a more effective tool to stimulate the economy than reducing taxes. We
construct new exogenous proxies that can be used in the traditional proxy VAR
approach resulting in similar estimates compared to our proposed hybrid SVAR
model.Comment: 10 figure