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The effect of unconventional fiscal policy on consumption expenditure

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  • D'Acunto, Francesco
  • Hoang, Daniel
  • Weber, Michael

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.

Suggested Citation

  • D'Acunto, Francesco & Hoang, Daniel & Weber, Michael, 2016. "The effect of unconventional fiscal policy on consumption expenditure," Working Paper Series in Economics 94, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
  • Handle: RePEc:zbw:kitwps:94
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    Cited by:

    1. repec:ces:ifodic:v:15:y:2017:i:1:p:19307480 is not listed on IDEAS
    2. Michael Weber & Ali Ozdagli, 2016. "Monetary Policy Through Production Networks: Evidence from the Stock Market," 2016 Meeting Papers 148, Society for Economic Dynamics.
    3. Andreas Neuhierl & Michael Weber, 2017. "Monetary Momentum," CESifo Working Paper Series 6648, CESifo Group Munich.
    4. Francesco D’Acunto & Daniel Hoang & Michael Weber, 2017. "The Effect of Unconventional Fiscal Policy on Consumption Expenditure," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 15(1), pages 09-11, April.
    5. Robert S. Chirinko & Daniel J. Wilson, 2016. "Job creation tax credits, fiscal foresight,and job growth: evidence from U.S. States," Working Papers 6, Department of the Treasury, Ministry of the Economy and of Finance.
    6. Anisha Ghosh & George M. Constantinides, 2017. "What Information Drives Asset Prices?," NBER Working Papers 23689, National Bureau of Economic Research, Inc.
    7. Maarten van Rooij & Jakob de Haan, 2016. "Will helicopter money be spent? New evidence," DNB Working Papers 538, Netherlands Central Bank, Research Department.
    8. 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.
    9. Djuric, Uros & Neugart, Michael, 2017. "Helicopter money: survey evidence on expectation formation and consumption behavior," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168062, Verein für Socialpolitik / German Economic Association.
    10. Scott R. Baker & Stephanie Johnson & Lorenz Kueng, 2017. "Shopping for Lower Sales Tax Rates," NBER Working Papers 23665, National Bureau of Economic Research, Inc.
    11. Francesco D'Acunto & Ryan Liu & Carolin Pflueger & Michael Weber, 2017. "Flexible Prices and Leverage," CESifo Working Paper Series 6317, CESifo Group Munich.
    12. Francesco D’Acunto & Daniel Hoang & Michael Weber, 2017. "The Effect of Unconventional Fiscal Policy on Consumption Expenditure," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 15(1), pages 09-11, 04.

    More about this item

    Keywords

    Zero-Lower Bound; Fiscal and Monetary Policy; Durable Consumption; Survey Data; Household Consumption;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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