In this paper, we explore the benefits from a supply-side oriented fiscal tax policy within the framework of a New Keynesian DSGE model. We show that countercyclical tax rules, which are contingent on the observed welfare gap or on the cost-push shock and levied on value added, remarkably reduce the adverse impact of cost-push shocks on welfare. We state that the tax rule establishes a path for the evolution of marginal cost at the firm level that largely prevents built up of price dispersion.

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... e highlight that this tax policy is also effective under a balancedbudget regime. Hence, fiscal policy can disencumber monetary policy in the light of cost-push shocks. JEL-classification: E32, E61, E62