VAT multipliers and pass-through dynamics

Simon Voigts

No 2016-026, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: To quantify fiscal multipliers in Eurozone countries, ECB, European Commission, and IMF draw heavily on large-scale DSGE models. In these models, the value added tax (VAT) is represented by a consumption tax, implying that changes in the tax liability directly translate into changes in consumer prices. This is inconsistent with empirical evidence suggesting that VAT pass-through in Europe is only gradual. To study the implications of this shortcoming for VAT multipliers, I derive a DSGE model featuring both a consumption tax and a VAT with pass-through dynamics consistent with empirical evidence. Short-run multipliers from the consumption tax are dramatically larger than those from the VAT, which suggests systematic overestimation in institutional research.

Keywords: Fiscal multipliers; value added tax; tax pass-through; DSGE models (search for similar items in EconPapers)
JEL-codes: E62 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb649:sfb649dp2016-026

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