The Effect of Unconventional Fiscal Policy on Consumption Expenditure

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 6059

Classification and Topics

• Classification: Wirtschaft ; Consumer Economics: Empirical Analysis ; Expectations; Speculations ; Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡ ; Macroeconomics: Consumption; Saving; Wealth ; Price Level; Inflation; Deflation ; Business Fluctuations; Cycles ; Monetary Policy ; Studies of Particular Policy Episodes
• Subject: zero-lower bound ; fiscal and monetary policy ; durable consumption ; survey data

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): D'Acunto, Francesco ; Hoang, Daniel ; Weber, Michael
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/147313
• Last update: 10.03.2025, 11:44 AM CET