The Household Expenditure Response to a Consumption Tax Rate Increase

53 Pages Posted: 7 Apr 2017

See all articles by David B. Cashin

David B. Cashin

Board of Governors of the Federal Reserve System

Date Written: 2017-03-28

Abstract

This study measures the effect of an increase in Japan's Value Added Tax rate on the timing of household expenditures and consumption, which do not necessarily coincide. The analysis finds that durable and storable expenditures surged in the month prior to the tax rate increase, fell sharply upon implementation, but quickly returned to their previous long-run levels. Non-storable non-durable expenditures increased slightly in the month prior to the tax rate increase, but were otherwise unresponsive. A dynamic structural model of household consumption reveals that the observed expenditure responses were driven by stockpiling behavior, the insensitivity of durable and non-durable consumption to a change in the real interest rate, and strong complementarities between durables and non-durables. The results suggest that salient intertemporal price variation may have a large, though highly transitory impact on household expenditures.

Keywords: Consumption, Fiscal policy, Intertemporal substitution, VAT

JEL Classification: D12, E21, E62, E65, H24, H31

Suggested Citation

Cashin, David B., The Household Expenditure Response to a Consumption Tax Rate Increase (2017-03-28). FEDS Working Paper No. 2017-035, Available at SSRN: https://ssrn.com/abstract=2947570 or http://dx.doi.org/10.17016/FEDS.2017.035

David B. Cashin (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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