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Sticker shocks: using VAT changes to estimate upper-level elasticities of substitution

Bart Hobijn () and Fernanda Nechio

No 2015-17, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We estimate the upper-level elasticity of substitution between goods and services of a nested aggregate CES preference specification. We show how this elasticity can be derived from the long-run response of the relative price of a good to a change in its VAT rate. We estimate this elasticity using new data on changes in VAT rates across 74 goods and services for 25 E.U. countries from 1996 through 2015. Our results point to an upper-level elasticity of between 1, at a high level of aggregation that distinguishes 12 categories of goods and services, and 3, at the lowest level of aggregation with 74 categories.

JEL-codes: D12 E19 E21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2015-10-26, Revised 2017-10
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2015-17

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DOI: 10.24148/wp2015-17

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