Felix Montag, Alina Sagimuldina, Monika Schnitzer, 25 August 2020

To combat the consequences of the COVID-19 pandemic, the German government unveiled an unprecedented stimulus package on 3 June which, among other policies, includes a temporary reduction of value-added tax rates between July and December 2020. The aim of this policy is to temporarily lower prices and stimulate consumption through higher inflation expectation. This column presents the first estimates of the pass-through rate for a major sector of the economy. It shows that for retail fuel, pass-through was fast, substantial, but incomplete, with pass-through rates depending on the competiveness of the relevant market.

Francesco D'Acunto, Daniel Hoang, Michael Weber, 08 June 2020

The German administration has just released their €130 billion economic stimulus package, the most prominent measure of which is an unconventional fiscal policy in the form of a sudden drop in VAT. The aim is to create a future path of increasing sales taxes by increasing prices and hence stimulating inflation expectations and aggregate demand today. This column argues that earlier episodes have shown that unconventional policy is effective because it is easily understood by non-expert households and households react to it strongly. Alternative unconventional measures, instead, such as forward guidance, are largely ineffective in part because households do not understand what such policies imply for their consumption.  


CEPR Policy Research