A short-run assessment of the effects of VAT on consumption patterns: the Greek experience

The short-run effects of value-added tax (VAT) on individual commodity prices, the consumer price index, and the allocation patterns of total consumption expenditures among groups of commodities in Greece are evaluated. The methodological approach used is based on the static almost ideal demand system (AIDS), which was estimated and tested for thirteen commodity groups using time-series data (1958-86). The FIML approach was used for the estimation of the AIDS. The model was simulated for the post-VAT period. The principal results indicate that VAT has changed the structure of prices and demand, altered the pre-VAT allocation of total consumption expenditures among the groups of goods and services and raised the overall consumer price index.