The Effect of VAT Rate on Price Setting Behaviour in Latvia: Evidence from CPI Micro Data
Konstantins Benkovskis () and
No 2013/01, Working Papers from Latvijas Banka
This paper evaluates the inflation effect of recent VAT rate changes in Latvia by using CPI micro data. Our findings suggest that the pass-through of the tax rate to consumer prices is strong in case of upward tax adjustments, especially when there are no demand restrictions, while the pass-through is weaker for tax reductions. The frequency of price changes peaks at the moment of VAT adjustment, which, however, is partially compensated by lower average size of price revisions. The level of pass-through exhibits a high degree of heterogeneity with higher pass-through for goods, especially food, and lower for services.
Keywords: VAT; inflation; sample selection model; CPI micro data; Latvia (search for similar items in EconPapers)
JEL-codes: C24 D40 E31 H20 (search for similar items in EconPapers)
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