Assessing temporary product-specific subsidies: a time series intervention analysis

Abstract

We propose an analytical forecasting framework to quantify the distortionary effects of product-specific subsidies. The novelty consists of a dual approach combining intervention analysis and a state-space modeling approach to construct and assess counterfactuals. Our pure intervention model approach faces challenges in identifying policy effects because, in certain sectors, these are weak and align with the crisis. We complement this approach by fitting a bivariate state-space model excluding the policy and creating counterfactual forecasts for periods of crisis. We then compare intervention analysis estimates of counterfactual series to those of observed series. Subsidizing one industry during global recessions seems unjustified and non-competitive. In our application, we use a time series of foreign and domestic order book levels during and after the temporary installation of an unprecedentedly generous car scrappage scheme in 2009. We assess implied disruptions in the automobile sector and eleven competing manufacturing industries in Germany. We find stimulus effects to be just mild, some evidence of intertemporal payback, and consumers’ windfall gains to come at the expense of other industries.

Keywords

• Automobile industry
• Kalman filter
• intervention analysis
• counterfactual analysis