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Thailand's Car Tax Rebate Scheme and Consumption Responses: the Role of Durable Goods with Adjustment Costs

Tanisa Tawichsri
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Tanisa Tawichsri: Office of the National Economic and Social Development Board

PIER Discussion Papers from Puey Ungphakorn Institute for Economic Research

Abstract: In 2011, Thailand faced the largest ood in seventy years. In response to the unexpected crisis the Thai government rolled out Thailand's car tax rebate scheme in an attempt to prevent the economy from slipping into a deep recession. This study investigates consumption responses to changes in vehicle prices induced by the car tax rebate scheme presented in the framework of a life-cycle model. The model features durable goods with adjustment costs and non-homothetic preference. The key features match the fact that car purchases are lumpy and infrequent and that cars are luxury goods in Thailand. Additionally, liquidity constraints and adjustment costs are also important features for the evaluation of shorter-run consumption responses. Key parameters are estimated to match household-level data. Then partial equilibrium responses, which are key inputs to inform the aggregate outcome of the policy, are simulated given a distribution of the population wealth, income,and age in the economy. Findings show that Thai households have large elasticity of intertemporal substitution (EIS), hence large responses to the scal stimulus. Furthermore, non-homotheticity in the preference generates heterogeneous policy responses varied by household income and wealth. The model predicts that the temporary price shock will lead to a large cutback in future consumption and saving, consistent with the evidence shown by aggregate data. A number of alternative policy experiments are also conducted.

Pages: 72 page
Date: 2018-11, Revised 2018-11
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