Working Paper: CEPR ID: DP16690
Authors: Rüdiger Bachmann; Benjamin Born; Olga Goldfayn; Georgi Kocharkov; Ralph Luetticke; Michael Weber
Abstract: We exploit Germany’s temporary three-percentage-point VAT cut in the second half of 2020 to study the spending response to unconventional fiscal policy. We use survey and scanner data on household consumption expenditures and their perceived pass-through of the tax change into prices and a HANK model to quantify the effects of this VAT policy. The survey and scanner data show that the temporary VAT reduction led to a relative increase in durable and, to a lesser extent, semi-durable spending for individuals with high perceived pass-through. According to the HANK model, the VAT policy increased total aggregate consumption spending by 4.3 percent on impact.
Keywords: unconventional fiscal policy; value added tax; survey data; expectations; consumption; household data
JEL Codes: D12; E20; E21; E62; E65; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| VAT cut (H25) | durable spending (H56) |
| VAT cut (H25) | semi-durable spending (D12) |
| VAT cut (H25) | non-durable spending (E20) |
| High perceived passthrough (H22) | durable spending (H56) |
| VAT cut (H25) | aggregate consumption spending (E20) |