Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/256810 
Year of Publication: 
2022
Series/Report no.: 
DIW Discussion Papers No. 1944
Version Description: 
This (updated) version: May 2022
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
Abstract: 
This paper evaluates the temporary VAT reduction introduced by the German government over the 3Q2020:4Q2020 as a controversial part of the COVID-19 stimulus package. Critics argue that VAT reductions are ineffective because of limited pass-through to consumer prices and during lockdown. Advocates emphasize positive effects on durable goods and stress that a VAT reduction can partly substitute for a limited monetary policy response under the zero lower bound (ZLB). Thus, the VAT policy experiment of a sizable two-quarter VAT reduction allows studying the effects and transmissions channels of VAT measures. We extend a dynamic stochastic equilibrium (DSGE) model to address a durable goods channel and a limited VAT pass-through and distinguish between sectors directly and indirectly affected by the lockdown. We trace lockdown and fiscal shocks and analyze the impact of the VAT reduction in conjunction with the lockdowns in 2020-2021 in Germany. We use nonlinear solution techniques to solve the model in the presence of a ZLB, forced savings and a partial lockdown constraint. Although the lockdown restriction reduces the effectiveness of a temporary VAT reduction, we find a short-term multiplier of 1.8. However, the cumulative multiplier reduces to below 1 over the medium term due to a shift in durable goods consumption toward 2020. Thus, the temporary VAT reduction is an effective instrument for short-term stabilization during the partial lockdown, but fiscal costs appear in the medium term.
Subjects: 
value added tax
fiscal policy
COVID-19
lockdown
multiplier
Germany
JEL: 
E62
E65
H12
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.