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A Temporary VAT Cut as Unconventional Fiscal Policy

Author

Listed:
  • Rüdiger Bachmann

  • Benjamin Born

  • Olga Goldfayn-Frank

  • Georgi Kocharkov

  • Ralph Luetticke

  • Michael Weber

Abstract

We exploit Germany’s temporary three-percentage-point VAT cut in the second half of 2020 to study the spending response to unconventional fiscal policy. We use survey and scanner data on household consumption expenditures and their perceived pass-through of the tax change into prices, and a HANK model to quantify the effects of this VAT policy. The survey and scanner data show that the temporary VAT reduction led to a relative increase in durable and, to a lesser extent, semi-durable spending for individuals with high perceived pass-through. According to the HANK model, the VAT policy increased total aggregate consumption spending by 4.4 percent on impact.

Suggested Citation

  • Rüdiger Bachmann & Benjamin Born & Olga Goldfayn-Frank & Georgi Kocharkov & Ralph Luetticke & Michael Weber, 2026. "A Temporary VAT Cut as Unconventional Fiscal Policy," CRC TR 224 Discussion Paper Series crctr224_2025_728, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2025_728
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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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