The Effect of Unconventional Fiscal Policy on Consumption Expenditure
83 Pages Posted: 19 Aug 2016 Last revised: 27 Mar 2018
There are 5 versions of this paper
The Effect of Unconventional Fiscal Policy on Consumption Expenditure
Unconventional Fiscal Policy, Inflation Expectations, and Consumption Expenditure
The Effect of Unconventional Fiscal Policy on Consumption Expenditure
The Effect of Unconventional Fiscal Policy on Consumption Expenditure
The Effect of Unconventional Fiscal Policy on Consumption Expenditure
Date Written: March 12, 2018
Abstract
Unconventional fiscal policy uses announcements of future increases in consumption taxes to generate inflation expectations and accelerate consumption expenditure. We exploit a 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 individual 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.
Keywords: Zero-Lower Bound, Fiscal and Monetary Policy, Durable Consumption, Survey Data, Household Consumption
JEL Classification: D12, D84, D91, E21, E31, E32, E52, E65
Suggested Citation: Suggested Citation