The effect of VAT rate on inflation in Latvia: evidence from CPI microdata

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Abstract:

This article evaluates the inflation effect of recent value added tax (VAT) rate changes in Latvia by using consumer price index (CPI) microdata. Our findings suggest that the pass-through of the tax rate to consumer prices is strong in case of upward tax adjustments, especially when there are no demand restrictions, while the pass-through is weaker for tax reductions. The frequency of price changes peaks at the moment of VAT adjustment, which, however, is partially compensated by lower average size of price revisions. The level of pass-through exhibits a high degree of heterogeneity with higher pass-through for goods, especially food, and lower for services.

Keywords: C24; CPI microdata; D40; E31; H20; Latvia; inflation; sample selection model; value added tax

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2014.904492

Affiliations: Monetary Policy Department, Bank of Latvia, Kr. Valdemara iela 2A, LV-1050, Riga, Latvia

Publication date: July 23, 2014

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