The effects of fiscal stimulus: firm-level evidence from selective temporary consumption tax cuts

Abstract

The paper investigates the effects of temporary consumption tax cuts for selected durables in Turkey in 2009 using firm-level data. Our empirical strategy exploits variation in firm exposure to the tax cuts and at the same time controls for unobserved industry- and region-specific shocks to address potential endogeneity. Using data on the change of sales of firms that benefited from this measure and of those that did not over different periods, we find positive and robust effects of consumption tax cuts on the change of firm sales. In line with theoretical predictions, we also find a reversal of these effects following the expiration of the tax cuts.