Discussion Paper Details

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Title: A Temporary VAT Cut as Unconventional Fiscal Policy

Author(s): Rüdiger Bachmann, Benjamin Born, Olga Goldfayn-Frank, Georgi Kocharkov, Ralph Luetticke and Michael Weber

Publication Date: November 2021

Keyword(s): Consumption, Expectations, household data, survey data, unconventional fiscal policy and value added tax

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We exploit the unexpected announcement of an immediate, temporary VAT cut in Germany in the second half of 2020 as a natural experiment to study the spending response to unconventional fiscal policy. We use survey and scanner data on households' consumption expenditures and their perceived pass-through of the tax change into prices to quantify its effects. The temporary VAT cut led to a substantial relative increase in durable spending of 36% for individuals with a high perceived pass-through. Semi- and non-durable spending also increased. According to our preferred estimates, the VAT policy increased aggregate consumption spending by 34 billion Euros.

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Bibliographic Reference

Bachmann, R, Born, B, Goldfayn-Frank, O, Kocharkov, G, Luetticke, R and Weber, M. 2021. 'A Temporary VAT Cut as Unconventional Fiscal Policy'. London, Centre for Economic Policy Research.