Efectos de Cambios en Impuestos Indirectos en la Inflación

Carlos García, Pablo Garcia Silva, M. Carolina Grünwald, Felipe Liendo, Igal Magendzo and Enrique Orellana

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: This document analyses and estimates the effect on inflation of the recently announced changes in indirect taxes (VAT and tariffs), using different methodologies. The combined effects of the tariff reductions (TLCs with the US, the European Union and Korea) and the planned VAT increase are almost neutral from a fiscal point of view. Nevertheless, under reasonable assumptions, the effect of the increase in VAT on inflation should be around half percentage point during the last quarter of 2003. This estimation assumes that inflation expectations remain unchanged, that markups suffer a mild long run compression, and that wage indexation to CPI is in place. The tariff reduction with the US should induce one tenth of a percentage point of lower annual inflation during 2004. This magnitude is similar to the estimated effect of the tariff reduction with the European Community that is already incorporated into inflation forecasts. The combined effect on annual inflation of the VAT increase and the tariff reduction with the USA is expected to be slightly below 0,5% during 2004. As for any forecast, the figures presented above are subject to important degrees of uncertainty. These numbers can be smaller if markups compress further or even go as high as 1% if credibility is lost. Monthly inflation before, during and right after the change in VAT will be highly informative with respect to alternative scenarios. Naturally, the incoming information can lead to a change in the estimations presented here. Particularly important will be the inflation rate of the month of October, when the impact effect of the increased VAT will be felt.

Date: 2003-09
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