Are Fiscal Multipliers Estimated with Proxy-SVARs Robust?

We estimate government spending and tax multipliers via a flexible proxy-SVAR model, where identification is achieved by combining fiscal and non-fiscal instruments with additional parametric restrictions. We find that, while the spending multiplier is robustly estimated to be larger than one across different models, the estimate of the tax multiplier is sensitive to the combination of instruments that are used. We unveil that the key factor behind these heterogenous estimates is the assumption of orthogonality between the non-fiscal proxy and the tax shock. If this assumption is imposed, the tax multiplier is around one. If it is not imposed, the tax multiplier is three times as large. We provide empirical evidence in favour of the latter specification.