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Inflation Smoothing and the Modest Effect of VAT in Germany

Author/Editor: Carare, Alina | Danninger, Stephan
Authorized for Distribution: July 1, 2008
Electronic Access: Free Full Text (PDF file size is 465KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: Increases in German core inflation following the 2007 VAT hike were smaller than expected, leading to speculation about delayed inflationary effects. This paper argues to the contrary that price increases in advance of the VAT hike explain the small increase upon implementation. We find that core inflation rose by 0.36 percentage point in the run up and by a further 0.40 percentage point at the time of the VAT hike. Cumulatively, the tax hike contributed to two thirds of the increase in core inflation in 2006-07 at an estimated pass-through of 73 percent. Most of the increase in 2006 was of general nature, while about one sixth can be attributed to durable goods and items with low degree of competition.
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Series: Working Paper No. 08/175
Subject(s): Germany | Inflation | Value added tax | Price increases | Competition
Author's keyword(s): Inflation | VAT
    Published:   July 1, 2008        
            Format:   Paper
    Stock No:   WPIEA2008175   Pages:   21
    Price:   US$18.00 (Academic Rate: US$18.00 )
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