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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
The Household Expenditure Response to a Consumption Tax Rate Increase
David B. Cashin
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.


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David B. Cashin, The Household Expenditure Response to a Consumption Tax Rate Increase, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2017-035, 28 Mar 2017.
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Keywords: Consumption ; Fiscal policy ; Intertemporal substitution ; VAT
DOI: 10.17016/FEDS.2017.035
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