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The Distributional Impact of VAT Reduction for Food in Hungary: Results from a Hungarian Microsimulation Model

Cathal O’Donoghue (), Jinjing Li, Ilona Cserháti (), Péter Elek (), Tibor Keresztély () and Tibor Takács ()
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Cathal O’Donoghue: National University of Ireland, Galway, Ireland
Ilona Cserháti: Corvinus University of Budapest, Hungary.
Péter Elek: Corvinus University of Budapest, Hungary.
Tibor Keresztély: Corvinus University of Budapest, Hungary.
Tibor Takács: Corvinus University of Budapest, Hungary.

Authors registered in the RePEc Author Service: Cathal O'donoghue ()

International Journal of Microsimulation, 2018, vol. 11, issue 3, 2-38

Abstract: In this paper we illustrate how the incorporation of behavioural responses and dynamic effects alters the conclusions of static household microsimulation models on the distributional impacts of economic policies. Based on Hungary’s Household Budget and Living Conditions Survey, we model household consumption using the demand system approach of Creedy, 1998. This method makes it possible to obtain reasonable price elasticity estimates of consumption from cross-sectional data by combining them with Frisch-parameter values obtained from cross-country studies. With this consumption module, we simulate the distributional impacts of a hypothetical food VAT rate change in Hungary and show how the static and behavioural impact estimates differ according to income decile. We examine the sensitivity of our results to the choice of the country-level Frisch-parameter and to a realistic allowance for household-level variation in the Frisch-parameter.

JEL-codes: C10 C15 C54 E21 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:ijm:journl:v:11:y:2018:i:3:p:2-38