Publication Date


Document Type


First Advisor

Groves, Jeremy R.

Degree Name

Ph.D. (Doctor of Philosophy)

Legacy Department

Department of Economics


This dissertation consists of three independent but methodologically similar chapters focusing on the impact of U.S. tax policy changes and understanding the risk-return examination of the U.S. real estate investment trusts (REIT) equity returns. The first and second chapters examine how the U.S. federal and state level economies are likely to react to narrative personal and corporate income tax changes. The third chapter investigates the responses of the U.S. real estate investment trusts (REIT) equity returns to volatility in the U.S. housing market as measured by a newly constructed risk index.

The first chapter examines the short- and long-run effects of U.S. federal personal income and corporate income tax cuts on a wide array of economic policy variables in a data-rich environment. Using a panel of U.S. macroeconomic data set, made up of 132 quarterly macroeconomic series for 1959-2018, the study estimates factor-augmented vector autoregression (FAVARs) models where an extended narrative tax changes dataset combined with unobserved factors. The narrative approach classifies if tax changes are exogenous or endogenous. This paper identifies narrative tax shocks in the vector autoregression model using the sign restrictions with the Uhlig's (2005) penalty function. Empirical findings show a significant expansionary effect of tax cuts on the macroeconomic variables. Cuts in personal and corporate income taxes cause a rise in output, investment, employment, and consumption; however, cuts in personal taxes appear to be a more effective fiscal policy tool than the cut in corporate income taxes. Real GDP, corporate profit, investment, and industrial production increase significantly and reach their maximum response values two years after personal income tax cuts. The effects of corporate tax cuts have relatively smaller effects on output and consumption but show immediate and higher effects on the S&P 500 index, corporate profit, and consumer price index. At the sectoral level, cuts in either type of taxes are shown to cause an immediate effect on federal funds rate, government spending, and public debt. The second chapter investigates the assumption of homogeneous effects of federal tax changes across the U.S. states and identifies where and why that assumption may not be valid. More specifically, what determines the transmission mechanism of tax shocks at the state level? How vital are states' fiscal structures, financial conditions, labor market rigidities, and industry mix? Do these economic and structural characteristics drive the transmission mechanism of the tax changes at the state level at different horizons? This study employs a panel factor-augmented vector autoregression (FAVAR) technique to answer these issues. The findings show state economies respond homogeneously in terms of employment and price levels; however, do react heterogeneously in terms of real GDP and personal income growth, and, in most states, these reactions are statistically significant and the heterogeneity in the effects of tax cuts is significantly related to the state's fiscal structure, manufacturing and financial composition, and the labor market's rigidity. A cross-state regression analysis shows that states with higher tax elasticity, higher personal income tax, strict labor market rigidity, and policy uncertainties are relatively less responsive to federal taxes. In contrast, the magnitude of the response in real GDP, personal income, and employment to tax cuts is relatively higher in states with a larger share of finance, manufacturing, lower tax burdens, and flexible credit markets.

The third chapter examines how volatilities in the housing sector affect real estate investment trusts (REIT) equity return in the United States. This chapter proposes a factor-based housing risk index that uses the time-varying, conditional volatility of ten housing variables to be used as an additional measure of the U.S. housing risk. The findings show that proposed housing risk betas are theoretically consistent with the risk-return relationship of the conditional Intertemporal Capital Asset Pricing Model (ICAPM) of Merton (1973), and predict an average maximum of 5.6 percent of risk premium in REIT equity return. In subsample analyses, the positive relationship is not affected by sample periods' choice but shows higher housing risk beta values for the 2009-18 sample period. The relationship remains significant after controlling for Fama-French three factors and a broad set of macroeconomic and financial variables. Moreover, the proposed housing risk index also forecasts U.S. macroeconomic and financial conditions accurately.


196 pages




Northern Illinois University

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