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The Distributional Impact of VAT Reduction for Food in Hungary: Results from a Hungarian Microsimulation Model

Author

Listed:
  • Cathal O’Donoghue

    () (National University of Ireland, Galway, Ireland)

  • Jinjing Li

    () (The National Centre for Social and Economic Modelling, University of Canberra, Australia.)

  • Ilona Cserháti

    () (Corvinus University of Budapest, Hungary.)

  • Péter Elek

    () (Corvinus University of Budapest, Hungary.)

  • Tibor Keresztély

    () (Corvinus University of Budapest, Hungary.)

  • Tibor Takács

    () (Corvinus University of Budapest, Hungary.)

Abstract

In this paper we illustrate how the incorporation of behavioural responses and dynamic effects alters the conclusions of static household microsimulation models on the distributional impacts of economic policies. Based on Hungary’s Household Budget and Living Conditions Survey, we model household consumption using the demand system approach of Creedy, 1998. This method makes it possible to obtain reasonable price elasticity estimates of consumption from cross-sectional data by combining them with Frisch-parameter values obtained from cross-country studies. With this consumption module, we simulate the distributional impacts of a hypothetical food VAT rate change in Hungary and show how the static and behavioural impact estimates differ according to income decile. We examine the sensitivity of our results to the choice of the country-level Frisch-parameter and to a realistic allowance for household-level variation in the Frisch-parameter.

Suggested Citation

  • Cathal O’Donoghue & Jinjing Li & Ilona Cserháti & Péter Elek & Tibor Keresztély & Tibor Takács, 2018. "The Distributional Impact of VAT Reduction for Food in Hungary: Results from a Hungarian Microsimulation Model," International Journal of Microsimulation, International Microsimulation Association, vol. 11(3), pages 2-38.
  • Handle: RePEc:ijm:journl:v:11:y:2018:i:3:p:2-38
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    References listed on IDEAS

    as
    1. Creedy, John, 1998. "Measuring the Welfare Effects of Price Changes: A Convenient Parametric Approach," Australian Economic Papers, Wiley Blackwell, vol. 37(2), pages 137-151, June.
    2. André Decoster & Jason Loughrey & Cathal O'Donoghue & Dirk Verwerft, 2010. "How regressive are indirect taxes? A microsimulation analysis for five European countries," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 29(2), pages 326-350.
    3. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
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    9. André Decoster & Jason Loughrey & Cathal O'Donoghue & Dirk Verwerft, 2011. "Microsimulation of indirect taxes," International Journal of Microsimulation, International Microsimulation Association, vol. 4(2), pages 41-56.
    10. Molnár, György & Cseres-Gergely, Zsombor & Szabó, Tibor, 2016. "Pénzt vagy életet?. Empirikus eredmények néhány gazdaságpolitikai beavatkozás heterogén jóléti hatásairól
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    FRISCH-PARAMETER; MICROSIMULATION; POLICY ANALYSIS; VALUE ADDED TAX;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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