The Full, Persistent, and Symmetric Pass-Through of a Temporary VAT Cut

58 Pages Posted: 16 Apr 2024 Last revised: 20 Jul 2024

See all articles by Tiago Bernardino

Tiago Bernardino

Stockholm University - Institute for International Economic Studies (IIES)

Ricardo Duque Gabriel

Board of Governors of the Federal Reserve System; National Bureau of Economic Research (NBER)

João Nuno Quelhas

Bank of Portugal

Márcia Silva Pereira

Nova School of Business and Economics

Date Written: July 18, 2024

Abstract

We investigate the pass-through of a temporary value-added tax (VAT) cut on selected food products to consumer prices. Exploiting a novel dataset of daily online prices, we find that the VAT cut was fully transmitted to consumer prices, persisted throughout the policy duration, and prices returned to the pre-implementation trend after reversal. We provide evidence for two mechanisms driving this result: the policy's salience to consumers in a high inflation environment and the decline of producer prices when implemented. We estimate that the policy reduced the inflation rate by 0.68 percentage points on impact.

Keywords: value-added tax, pass-through, microdata, public policy, inflation

JEL Classification: E31, H20, H22

Suggested Citation

Bernardino, Tiago and Gabriel, Ricardo Duque and Quelhas, João Nuno and Silva Pereira, Márcia, The Full, Persistent, and Symmetric Pass-Through of a Temporary VAT Cut (July 18, 2024). Available at SSRN: https://ssrn.com/abstract=4788047 or http://dx.doi.org/10.2139/ssrn.4788047

Tiago Bernardino

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden

Ricardo Duque Gabriel

Board of Governors of the Federal Reserve System ( email )

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

HOME PAGE: http://www.ricardoduquegabriel.com/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

João Nuno Quelhas (Contact Author)

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Márcia Silva Pereira

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

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