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Inflation Smoothing and the Modest Effect of VAT in Germany

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  • Stephan Danninger
  • Alina Carare

Abstract

Increases in German core inflation following the 2007 VAT hike were smaller than expected, leading to speculation about delayed inflationary effects. This paper argues to the contrary that price increases in advance of the VAT hike explain the small increase upon implementation. We find that core inflation rose by 0.36 percentage point in the run up and by a further 0.40 percentage point at the time of the VAT hike. Cumulatively, the tax hike contributed to two thirds of the increase in core inflation in 2006-07 at an estimated pass-through of 73 percent. Most of the increase in 2006 was of general nature, while about one sixth can be attributed to durable goods and items with low degree of competition.

Suggested Citation

  • Stephan Danninger & Alina Carare, 2008. "Inflation Smoothing and the Modest Effect of VAT in Germany," IMF Working Papers 08/175, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:08/175
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    1. Hoffmann, Johannes & Jonker, Nicole & Lünnemann, Patrick & Vilmunen, Jouko & Dhyne, Emmanuel & Dias, Daniel & Le Bihan, Hervé & Álvarez, Luis J. & Veronese, Giovanni & Rumler, Fabio, 2005. "Price setting in the euro area: some stylized facts from individual consumer price data," Working Paper Series 524, European Central Bank.
    2. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
    3. Carbonnier, Clement, 2007. "Who pays sales taxes? Evidence from French VAT reforms, 1987-1999," Journal of Public Economics, Elsevier, vol. 91(5-6), pages 1219-1229, June.
    4. Besley, Timothy J. & Rosen, Harvey S., 1999. "Sales Taxes and Prices: An Empirical Analysis," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 157-178, June.
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    Cited by:

    1. Emmanuel Farhi & Gita Gopinath & Oleg Itskhoki, 2014. "Fiscal Devaluations," Review of Economic Studies, Oxford University Press, vol. 81(2), pages 725-760.
    2. Wagner, Franz W. & Weber, Stefan & Gegenwarth, Lisa, 2014. "Wird die Umsatzsteuer überwälzt? Eine empirische Studie der Preispolitik im deutschen Hotelgewerbe," arqus Discussion Papers in Quantitative Tax Research 179, arqus - Arbeitskreis Quantitative Steuerlehre.
    3. Ruud de Mooij & Michael Keen, 2012. ""Fiscal Devaluation" and Fiscal Consolidation: The VAT in Troubled Times," NBER Chapters,in: Fiscal Policy after the Financial Crisis, pages 443-485 National Bureau of Economic Research, Inc.
    4. Hobijn, Bart & Nechio, Fernanda, 2015. "Sticker shocks: using VAT changes to estimate upper-level elasticities of substitution," Working Paper Series 2015-17, Federal Reserve Bank of San Francisco, revised Oct 2017.
    5. Philip Kofi Adom & Kwaku Amakye & Edinam Doh & Regina Anku, 2014. "SMEs Record Keeping in Ghana: Has VAT Made It Better?," International Journal of Economics and Financial Issues, Econjournals, vol. 4(1), pages 152-169.
    6. Dora Benedek & Ruud A. de Mooij & Michael Keen & Philippe Wingender, 2015. "Estimating VAT Pass Through," CESifo Working Paper Series 5531, CESifo Group Munich.
    7. Martin Mellens & Hendrik Vrijburg & Jonneke Dijkstra, 2014. "Robust estimation of the VAT pass-through in the Netherlands," CPB Discussion Paper 297, CPB Netherlands Bureau for Economic Policy Analysis.
    8. Ines Buono & Sara Formai, 2016. "The evolution of the anchoring of inflation expectations," Questioni di Economia e Finanza (Occasional Papers) 321, Bank of Italy, Economic Research and International Relations Area.
    9. Bart Hobijn & Fernanda Nechio, 2015. "Sticker Shocks: VAT changes and the substitution across expenditure categories," 2015 Meeting Papers 697, Society for Economic Dynamics.
    10. Büttner, Thiess & Madzharova, Boryana, 2017. "The Effects of Pre-announced Consumption Tax Reforms on the Sales and Prices of Consumer Durables," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168201, Verein für Socialpolitik / German Economic Association.
    11. Thomas Crossley & Hamish Low & Cath Sleeman, 2014. "Using a temporary indirect tax cut as a fiscal stimulus: evidence from the UK," IFS Working Papers W14/16, Institute for Fiscal Studies.
    12. repec:wfo:wstudy:33942 is not listed on IDEAS
    13. repec:wfo:wstudy:33939 is not listed on IDEAS

    More about this item

    Keywords

    Competition; Inflation; Germany; Price increases; Value added tax; VAT; inflation rates; inflation rate; annual inflation;

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