DP16690 A Temporary VAT Cut as Unconventional Fiscal Policy

Author(s): Rüdiger Bachmann, Benjamin Born, Olga Goldfayn, Georgi Kocharkov, Ralph Luetticke, Michael Weber
Publication Date: November 2021
Keyword(s): Consumption, Expectations, household data, survey data, unconventional fiscal policy, value added tax
JEL(s): D12, E20, E21, E62, E65, H31
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16690

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.