Discussion paper

DP16690 A Temporary VAT Cut as Unconventional Fiscal Policy

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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Citation

Bachmann, R, B Born, O Goldfayn-Frank, G Kocharakov, R Luetticke and M Weber (eds) (2021), “DP16690 A Temporary VAT Cut as Unconventional Fiscal Policy”, CEPR Press Discussion Paper No. 16690. https://cepr.org/publications/dp16690