We exploit the unexpected announcement of an immediate, temporary VAT cut in Germany in the second half of 2020 as a natural experiment to study the spending response to unconventional fiscal policy. We use survey and scanner data on households’ consumption expenditures and their perceived pass-through of the tax change into prices to quantify its effects. The temporary VAT cut led to a substantial relative increase in durable spending of 36% for individuals with a high perceived pass-through. Semi- and non-durable spending also increased. According to our preferred estimates, the VAT policy increased aggregate consumption spending by 34 billion Euros.

More on this topic

BFI Working Paper·Apr 3, 2024

Bridging Theory and Empirical Research in Accounting

Matthias Breuer, Eva Labro, Haresh Sapra and Anastasia A. Zakolyukina
Topics: Fiscal Studies
BFI Working Paper·Aug 15, 2023

Sovereign Debt and Economic Growth When Government is Myopic and Self-interested

Viral V. Acharya, Raghuram Rajan and Jack Shim
Topics: Financial Markets, Fiscal Studies
BFI Working Paper·Jun 20, 2023

The Value of Student Debt Relief and the Role of Administrative Barriers: Evidence from the Teacher Loan Forgiveness Program

Brian Jacob, Damon Jones and Benjamin J. Keys
Topics: Fiscal Studies, Higher Education & Workforce Training