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VAT Rate Effect on Price Setting Behaviour in Latvia: Evidence from CPI Micro Data

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  • Konstantins Benkovskis
  • Ludmila Fadejeva

Abstract

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.

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Bibliographic Info

Paper provided by Latvijas Banka in its series Working Papers with number 2013/01.

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Date of creation: 11 Jun 2013
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Handle: RePEc:ltv:wpaper:201301

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Keywords: VAT; inflation; sample selection model; CPI micro data; Latvia;

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References

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  1. Luc Aucremanne & Emmanuel Dhyne, 2005. "Time-dependent versus State-dependent Pricing: A Panel Data Approach to the Determinants of Belgian Consumer Price Changes," Working Paper Research, National Bank of Belgium 66, National Bank of Belgium.
  2. Konstantins Benkovskis & Ludmila Fadejeva & Krista Kalnberzina, 2010. "Price Setting Behaviour in Latvia: Descriptive Evidence from CPI Microdata," Discussion Papers, Latvijas Banka 2010/01, Latvijas Banka.
  3. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, Econometric Society, vol. 47(1), pages 153-61, January.
  4. Patrick Lünnemann & Thomas Mathä, 2005. "Consumer price behaviour in Luxembourg: evidence from micro CPI data," BCL working papers 17, Central Bank of Luxembourg.
  5. Puhani, Patrick A, 2000. " The Heckman Correction for Sample Selection and Its Critique," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 14(1), pages 53-68, February.
  6. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, Elsevier, vol. 31(3), pages 255-274, April.
  7. Luc Aucremanne & Emmanuel Dhyne, 2004. "How frequently do prices change? Evidence based on the micro data underlying the Belgian CPI," Working Paper Research, National Bank of Belgium 44, National Bank of Belgium.
  8. Josef Baumgartner & Ernst Glatzer & Fabio Rumler & Alfred Stiglbauer, 2005. "How Frequently Do Consumer Prices Change in Austria? Evidence from Micro CPI Data," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 101, Oesterreichische Nationalbank (Austrian Central Bank).
  9. Benkovskis, Konstantins & Fadejeva, Ludmila & Kalnberzina, Krista, 2012. "Price setting behaviour in Latvia: Econometric evidence from CPI micro data," Economic Modelling, Elsevier, Elsevier, vol. 29(6), pages 2115-2124.
  10. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  11. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 1-23, February.
  12. Emmanuel Dhyne & Luis J. Álvarez & Hervé Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lünnemann & Fabio Rumler & Jouko Vilmunen, 2005. "Price setting in the euro area: Some stylized facts from Individual Consumer Price Data," Working Paper Research, National Bank of Belgium 74, National Bank of Belgium.
  13. Péter Gábriel & �dám Reiff, 2010. "Price setting in Hungary-a store-level analysis," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(2-3), pages 161-176.
  14. Laurent Baudry & Hervé Le Bihan & Patrick Sevestre & Sylvie Tarrieu, 2007. "What do Thirteen Million Price Records have to Say about Consumer Price Rigidity?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(2), pages 139-183, 04.
  15. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(5), pages 947-985, October.
  16. Hoffmann, Johannes & Kurz-Kim, Jeong-Ryeol, 2006. "Consumer price adjustment under the microscope: Germany in a period of low inflation," Working Paper Series, European Central Bank 0652, European Central Bank.
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