The Effect of Unconventional Fiscal Policy on Consumption Expenditure
83 Pages Posted: 19 Aug 2016 Last revised: 27 Mar 2018
Date Written: March 12, 2018
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