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The effect of unconventional fiscal policy on consumption expenditure

Listed author(s):
  • D'Acunto, Francesco
  • Hoang, Daniel
  • Weber, Michael

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.

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File URL: https://www.econstor.eu/bitstream/10419/146990/1/869652079.pdf
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Paper provided by Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering in its series Working Paper Series in Economics with number 94.

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Date of creation: 2016
Handle: RePEc:zbw:kitwps:94
Contact details of provider: Web page: http://www.wiwi.kit.edu/

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