Fiscal Instruments, Welfare and Inflation

This study aims at answering two research questions. Firstly, given a change in the VAT rate and a change in targeted transfers, which would impact inflation the most? Secondly, after a negative supply shock, which measure would be more welfare-friendly? We find that VAT changes generate a greater impact on inflation than changes in transfers, both empirically and within the structural model. Additionally, we find that a decrease in the VAT rate, though it generates more inequalities, is more welfare-friendly if it is measured through a utilitarian approach.