Economic Review, Vol. 73 No. 6, 2022.
Preliminary communication
https://doi.org/10.32910/ep.73.6.3
MACROECONOMIC EFFECTS OF DISCRETIONARY CHANGES IN THE VALUED ADDED TAX (VAT) IN CROATIA: A NARRATIVE APPROACH
Milan Deskar-Škrbić
Ana Grdović Gnip
Hrvoje Šimović
Abstract
Since its introduction in 1998., the value added tax (VAT) has been changed many times. Some changes were motivated by the need for fiscal consolidation, some by harmonisation with the EU legislation, while some others by the necessity to mitigate the regressive effect of VAT or the need to stimulate the economic activity. Given the important role of the VAT in the Croatian tax system and the tendency of policy makers to approach to the VAT as a fiscal tool relatively often, this paper examines the effect of VAT discretionary changes on GDP and personal consumption, using the so-called narrative approach. Being Croatia a small open economy, in this paper we adjust the original Romer and Romer (2010) narrative approach, such to include the effects of external shocks, which significantly alter Croatia’s macroeconomic developments. Our results show that a decrease in domestic demand due to an increase in the VAT tax burden is statistically significant up to the eight quarter after the shock and reaches the level of 4% in the fourth quarter. The reaction of personal consumption after the same shock is statistically significant only in the first year, and in this case a 1% tax increase leads to a decrease in personal consumption of slightly more than 1%.
Keywords
VAT; exogenous tax changes; narrative approach; GDP; personal consumption; Croatia
Hrčak ID:
288011
URI
Publication date:
21.12.2022.
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