The Effect of Unconventional Fiscal Policy on Consumption Expenditure

83 Pages Posted: 19 Aug 2016 Last revised: 27 Mar 2018

See all articles by Francesco D'Acunto

Francesco D'Acunto

Boston College

Daniel Hoang

Karlsruhe Institute of Technology (KIT)

Michael Weber

University of Chicago - Finance

Multiple version iconThere are 5 versions of this paper

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

D'Acunto, Francesco and Hoang, Daniel and Weber, Michael, The Effect of Unconventional Fiscal Policy on Consumption Expenditure (March 12, 2018). Becker Friedman Institute for Research in Economics Working Paper No. 2018-17. Available at SSRN: https://ssrn.com/abstract=2826084 or http://dx.doi.org/10.2139/ssrn.2826084

Francesco D'Acunto (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Daniel Hoang

Karlsruhe Institute of Technology (KIT) ( email )

Karlsruhe
Germany

Michael Weber

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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