The Effect of Unconventional Fiscal Policy on Consumption Expenditure

76 Pages Posted: 13 Oct 2016

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: August 23, 2016

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.

Keywords: zero-lower bound, fiscal and monetary policy, durable consumption, survey data

JEL Classification: D120, D840, D910, E210, E310, E320, E520, E650

Suggested Citation

D'Acunto, Francesco and Hoang, Daniel and Weber, Michael, The Effect of Unconventional Fiscal Policy on Consumption Expenditure (August 23, 2016). CESifo Working Paper Series No. 6059. Available at SSRN: https://ssrn.com/abstract=2851721

Francesco D'Acunto

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Daniel Hoang

Karlsruhe Institute of Technology (KIT) ( email )

Karlsruhe
Germany

Michael Weber (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
107
Abstract Views
376
rank
30,004
PlumX Metrics