The Effect of Unconventional Fiscal Policy on Consumption Expenditure
Unconventional ﬁscal policy uses announcements of future increases in consumption taxes to generate inﬂation expectations and accelerate consumption expenditure. We exploit a 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 individual 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.