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The Household Expenditure Response to a Consumption Tax Rate Increase

David B. Cashin

No 2017-035, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)

Abstract: This study measures the effect of an increase in Japan's Value Added Tax rate on the timing of household expenditures and consumption, which do not necessarily coincide. The analysis finds that durable and storable expenditures surged in the month prior to the tax rate increase, fell sharply upon implementation, but quickly returned to their previous long-run levels. Non-storable non-durable expenditures increased slightly in the month prior to the tax rate increase, but were otherwise unresponsive. A dynamic structural model of household consumption reveals that the observed expenditure responses were driven by stockpiling behavior, the insensitivity of durable and non-durable consumption to a change in the real interest rate, and strong complementarities between durables and non-durables. The results suggest that salient intertemporal price variation may have a large, though highly transitory impact on household expenditures.

Keywords: Consumption; Fiscal policy; Intertemporal substitution; VAT (search for similar items in EconPapers)
JEL-codes: D12 E21 E62 E65 H24 H31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-pbe
Date: 2017-03-28
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DOI: 10.17016/FEDS.2017.035

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