The effect of unconventional fiscal policy on consumption expenditure

Francesco D'Acunto, Daniel Hoang and Michael Weber

No 94, Working Paper Series in Economics from Karlsruhe Institute of Technology (KIT), Department of Economics and Management

Abstract: Unconventional fiscal policy uses announcements of future increases in consumption taxes to generate inflation expectations and accelerate consumption expenditure. It is budget neutral and time consistent. We exploit a unique natural experiment for an empirical test of the effectiveness of unconventional fiscal policy. To comply with European Union law, the German government announced in November 2005 an unexpected 3-percentage-point increase in value-added tax (VAT), effective in 2007. The shock increased households' inflation expectations during 2006 and actual inflation in 2007. Germans' willingness to purchase durables increased by 34% after the shock, compared to before and to matched households in other European countries not exposed to the VAT shock. Income, wealth effects, or intratemporal substitution cannot explain these results.

Keywords: Zero-Lower Bound; Fiscal and Monetary Policy; Durable Consumption; Survey Data; Household Consumption (search for similar items in EconPapers)
JEL-codes: D12 D84 D91 E21 E31 E32 E52 E65 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (61)

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Related works:
Journal Article: The Effect of Unconventional Fiscal Policy on Consumption Expenditure (2017)
Working Paper: The Effect of Unconventional Fiscal Policy on Consumption Expenditure (2016)
Working Paper: The Effect of Unconventional Fiscal Policy on Consumption Expenditure (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:kitwps:94

DOI: 10.5445/IR/1000062012

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